UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-K
_____________________
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 28, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to ______________
Commission
file number 001-34166
SunPower
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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94-3008969
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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3939
North First Street, San Jose, California 95134
(Address
of principal executive offices and zip code)
(408)
240-5500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Common Stock. $0.001 par value
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Nasdaq
Global Select Market
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Class
B Common Stock. $0.001 par value
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Nasdaq
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Class)
_____________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
Accelerated Filer x
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Accelerated
Filer ¨
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Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on June 29, 2008 was $2.6 billion. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the Nasdaq Global Market on June 27, 2008. For purposes of determining this
amount only, the registrant has defined affiliates as including the executive
officers and directors of registrant on June 27, 2008.
The total
number of outstanding shares of the registrant’s class A common stock as of
February 13, 2009 was 43,971,526.
The total
number of outstanding shares of the registrant’s class B common stock as of
February 13, 2009 was 42,033,287.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of
the registrant’s definitive proxy statement for the registrant’s 2009 annual
meeting of stockholders are incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III of this Annual Report on Form 10-K.
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Trademarks
The
following terms are our trademarks and may be used in this report: SunPower®,
PowerGuard®, SunTile®, PowerTracker®, and PowerLight®. All other trademarks
appearing in this report are the property of their holders.
Cautionary
Statement Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements that
do not represent historical facts. We use words such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “continue” and similar expressions to identify
forward-looking statements. Forward-looking statements in this Annual Report on
Form 10-K include, but are not limited to, our plans and expectations regarding
our ability to obtain financing, future financial results, operating results,
business strategies, projected costs, products, competitive positions,
management’s plans and objectives for future operations, and industry trends.
These forward-looking statements are based on information available to us as of
the date of this Annual Report on Form 10-K and current expectations, forecasts
and assumptions and involve a number of risks and uncertainties that could cause
actual results to differ materially from those anticipated by these
forward-looking statements. Such risks and uncertainties include a variety of
factors, some of which are beyond our control. Please see “Item 1A: Risk
Factors” and our other filings with the Securities and Exchange Commission for
additional information on risks and uncertainties that could cause actual
results to differ. These forward-looking statements should not be relied upon as
representing our views as of any subsequent date, and we are under no obligation
to, and expressly disclaim any responsibility to, update or alter our
forward-looking statements, whether as a result of new information, future
events or otherwise.
The
following information should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K. Our fiscal year ends on
the Sunday closest to the end of the applicable calendar year. All references to
fiscal periods apply to our fiscal quarters or year which ends on the Sunday
closest to the calendar month end.
ITEM 1:
BUSINESS
We are a
vertically integrated solar products and services company that designs,
manufactures and markets high-performance solar electric power technologies. Our
solar cells and solar panels are manufactured using proprietary processes, and
our technologies are based on more than 15 years of research and
development. Of all the solar cells available for the mass market, we believe
our solar cells have the highest conversion efficiency, a measurement of the
amount of sunlight converted by the solar cell into electricity. Our solar power
products are sold through our components business segment, or Components
Segment. In January 2007, we acquired PowerLight Corporation, or
PowerLight, now known as SunPower Corporation, Systems, or SP Systems,
which developed, engineered, manufactured and delivered large-scale solar power
systems. These activities are now performed by our systems business segment, or
our Systems Segment. Our solar power systems, which generate electricity,
integrate solar cells and panels manufactured by us as well as other suppliers.
For more information about financial condition and results of operations of each
segment, please see “Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Item
8: Financial Statements and Supplementary Data.”
Business
Segments Overview
Components
Segment: Our Components Segment sells solar power products,
including solar cells, solar panels and inverters, which convert sunlight to
electricity compatible with the utility network. We believe our solar cells
provide the following benefits compared with conventional solar
cells:
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superior
performance, including the ability to generate up to 50% more power per
unit area;
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superior
aesthetics, with our uniformly black surface design that eliminates highly
visible reflective grid lines and metal interconnect ribbons;
and
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more
efficient use of silicon, a key raw material used in the manufacture of
solar cells.
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We sell
our solar components products to installers and resellers, including our global
dealer network, for use in residential and commercial applications where the
high efficiency and superior aesthetics of our solar power products provide
compelling customer benefits. We also sell products for use in multi-megawatt
solar power plant applications. In many situations, we offer a materially lower
area-related cost structure for our customers because our solar panels require a
substantially smaller roof or land area than conventional solar technology and
half or less of the roof or land area of commercial solar thin film
technologies. We sell our products primarily in North America, Europe and Asia,
principally in regions where public policy has accelerated solar power adoption.
In fiscal 2008, 2007 and 2006, components revenue represented approximately 43%,
40% and 100%, respectively, of total revenue.
As
discussed more fully below, we manufacture our solar cells at our two facilities
in the Philippines, and are developing a third solar cell manufacturing facility
in Malaysia. Almost all of our solar cells are then combined into solar panels
at our solar panel assembly facility located in the Philippines. Our solar
panels are also manufactured for us by a third-party subcontractor in
China.
Systems
Segment: Our Systems Segment generally sells solar power
systems directly to system owners and developers. When we sell a solar power
system, it may include services such as development, engineering, procurement of
permits and equipment, construction management, access to financing, monitoring
and maintenance. We believe our solar systems provide the following benefits
compared with competitors’ systems:
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superior
performance delivered by maximizing energy delivery and financial return
through systems technology design;
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superior
systems design to meet customer needs and reduce cost, including
non-penetrating, fast roof installation technologies;
and
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superior
channel breadth and delivery capability including turnkey
systems.
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Our
Systems Segment is comprised primarily of the PowerLight (now known as SP
Systems) business we acquired in January 2007. Our customers include
commercial and governmental entities, investors, utilities, production home
builders and home owners. We work with development, construction, system
integration and financing companies to deliver our solar power systems to
customers. Our solar power systems are designed to generate electricity over a
system life typically exceeding 25 years and are principally designed to be
used in large-scale applications with system ratings of typically more than 500
kilowatts. Worldwide, more than 500 SunPower solar power systems have been
constructed or are under contract, rated in the aggregate at more than
400 megawatts of peak capacity. In fiscal 2008 and 2007, systems revenue
represented approximately 57% and 60%, respectively, of total
revenue.
We have
solar power system projects completed or in the process of being completed in
various countries including Germany, Italy, Portugal, South Korea, Spain and the
United States. We sell distributed rooftop and ground-mounted solar power
systems as well as central-station power plants. In the United States,
distributed solar power systems are typically rated at more than 500 kilowatts
of capacity to provide a supplemental, distributed source of electricity for a
customer’s facility. Many customers choose to purchase solar electricity under a
power purchase agreement with a financing company which buys the system from us.
In Europe and South Korea, our products and systems are typically purchased by a
financing company and operated as a central-station solar power plant. These
power plants are rated with capacities of approximately one to twenty megawatts,
and generate electricity for sale under tariff to private and public utilities.
In 2008, we began serving the utility market in the United States, as regulated
utilities began seeking cost-effective renewable energy to meet governmental
renewable portfolio standard requirements. Examples include
an agreement with Florida Power & Light Company, or FPL, to design and
build two solar photovoltaic power plants totaling 35 megawatts in Florida, and
another with Pacific Gas and Electric Company, or PG&E, to design and build
a 250 megawatt solar power plant in California.
We
manufacture certain of our solar power system products at our manufacturing
facilities in Richmond, California and at other facilities located close to our
customers. Some of our solar power system products are also manufactured for us
by third-party suppliers.
Our
Products and Services
Products
Sold Through Our Components Segment
Our solar
power products include solar cells and solar panels manufactured using
proprietary processes, and our technologies are based on more than 15 years
of research and development. We also sell a line of SunPower branded inverters
manufactured by third-parties.
Solar
Cells
Solar
cells are semiconductor
devices that directly convert sunlight into direct current electricity. Our
A-300 solar cell is a silicon solar cell with a specified power value of 3.1
watts and a conversion efficiency averaging between 20% and 21.5%. Our A-330
solar cell delivers 3.3 watts with a conversion efficiency of up to
22.7%. The A-330 solar cell started shipping in 2007. Our solar cells are
designed without highly reflective metal contact grids or current collection
ribbons on the front of the solar cells. This feature enables our solar cells to
be assembled into solar panels that exhibit a more uniform appearance than
conventional solar panels.
Solar
Panels
Solar
panels are solar cells electrically connected together and encapsulated in a
weatherproof package. We believe solar panels made with our solar cells are the
highest efficiency solar panels available for the mass market. Because our solar
cells are more efficient relative to conventional solar cells, when our solar
cells are assembled into panels, the assembly cost per watt is less because more
power can be incorporated into a given size package. Higher solar panel
efficiency allows installers to mount a solar power system with more power
within a given roof or site area and can reduce per watt installation
costs.
Products Sold
Through Our Systems Segment
Our solar
electric power system technology integrates solar cells and solar panels to
convert sunlight to electricity. Our systems are principally designed to be used
in large-scale utility, commercial, public sector and production home
applications.
PowerGuard®
Roof System
Our
PowerGuard® Roof System is a roof-mounted solar panel mounting system that
delivers reliable, clean electricity while insulating and protecting the roof.
PowerGuard® is a proprietary, pre-engineered solar power roofing tile system.
Each PowerGuard® tile consists of a solar laminate, lightweight cement substrate
and styrofoam base. Designed for quick and easy installation, PowerGuard® tiles
fit together with interlocking tongue-and-groove side surfaces. In addition to
generating electricity, PowerGuard® roof systems also insulate and protect the
roof membrane from ultraviolet rays and thermal degradation. This saves both
heating and cooling energy expenses and extends the roof life. The PowerGuard®
roof system has been tested and certified by Underwriters Laboratories Inc., or
UL, and has received a UL Class B fire rating which we believe facilitates
obtaining building permits and inspector approvals.
Our
PowerGuard® system resists wind uplift without compromising the rooftop’s
structural integrity. In comparison, conventional solar power systems typically
penetrate the roof. Systems that require drilling many holes into rooftops to
install and secure solar panels may compromise the integrity of the roof and
reduce its life span. To avoid drilling holes, certain other conventional
systems add weight for stability against wind and weather, which may exceed
weight limits for some commercial buildings’ roofs.
PowerGuard®
tiles typically weigh approximately four pounds per square foot, which is
supported by most commercial rooftops. Our technology integrates this
lightweight construction with a patented pressure equalizing design that has
been tested to withstand winds of up to 140 miles per hour. PowerGuard® roof
systems have been installed in a broad range of climates, including California,
Illinois, Hawaii, Massachusetts, Nevada, New Jersey, New York, Canada and
Switzerland and on a wide variety of building types, from rural single story
warehouses to urban high rise structures.
SunPower® T-10 Commercial Solar Roof
Tiles
SunPower®
T-10 commercial solar roof tiles are pre-engineered solar panels that tilt at a
10-degree angle. Depending on geographical location and local climate
conditions, this can allow for the generation of up to 10% more annual energy
output than traditional flat roof-mounted systems. These non-penetrating panels
interlock for secure, rapid installation on rooftops without compromising the
structural integrity of the roof.
Similar
to our PowerGuard® product, the SunPower® T-10 commercial roof tile is
lightweight, weighing less than four pounds per square foot, and is installed
without penetrating the roof surface. Sloped side and rear wind deflectors
improve wind performance, allowing T-10 arrays to withstand winds up to 120
miles per hour.
Whereas
PowerGuard® performance is optimized in constrained rooftop environments where
it contributes to maximum power density, commercial roof tile performance is
optimized for larger roofs with less space constraints as well as underutilized
tracks of land, such as ground reservoirs.
SunTile®
Roof Integrated System for Residential Market
Our
SunTile® product is a highly efficient solar power shingle roofing system
utilizing our A-300 solar cell technology that is designed to integrate with
conventional residential roofing materials. SunTile® solar shingles are designed
to replace multiple types of roof panels, including the most common concrete
flat, low and high profile “S” tile and composition shingles. We believe that
SunTile® is less visible on a roof than conventional solar technology because
the solar panel is integrated directly into the roofing material instead of
mounted onto the roof. SunTile® has a UL-listed Class A fire rating, which
is the highest level of fire rating provided by UL. SunTile® is designed to be
incorporated by production home builders into the construction of their new
homes.
Ground Mounted SunPower® Tracker Systems
We offer
several types of ground-mounted solar power systems using our PowerTracker®
technology, now referred to as SunPower® Tracker. SunPower® Tracker is a
single-axis tracking system that automatically pivots solar panels to track the
sun’s movement throughout the day. We believe this tracking feature increases
the amount of sunlight that is captured and converted into energy by up to 30%
over flat or fixed-tilt systems depending on geographic location and local
climate conditions. A single motor and drive mechanism can control 10 to 20
rows, or more than 200 kilowatts of solar panels. The multi-row feature
represents a cost advantage for our customers over dual axis tracking systems,
as such systems require more motors, drives, land, and power to operate per
kilowatt of capacity. The SunPower® Tracker system can be assembled onsite, and
is easily scalable. We have installed ground-mounted systems integrating
SunPower® Tracker in a wide range of geographical markets including Arizona,
California, Hawaii, Nevada, New Jersey, Germany, Portugal, Spain and South
Korea.
Fixed Tilt and SunPower® Tracker Systems for Parking
Structures
We have
developed and patented several designs for solar power systems for parking
structures in multiple configurations. These dual use systems typically
incorporate solar panels into the roof of a carport or similar structure to
deliver onsite solar power while providing shade and protection. Aesthetically
pleasing, standardized and scalable, they are well suited for parking lots
adjacent to facilities. In addition, we have incorporated our SunPower® Tracker
technology into certain of our systems for elevated parking structures to
provide a differentiated product offering to our customers.
Other
System Offerings
We have
other products that leverage our core systems. For example, our metal roof
system is designed for sloped-metal roof buildings, which are used in some
winery and warehouse applications. This solar power system is designed for rapid
installation. We also offer other architectural products such as day lighting
with translucent solar panels.
Balance
of System Components
“Balance
of system components” are components of a solar power system other than the
solar panels, and include SunPower branded inverters, mounting structures,
charge controllers, grid interconnection equipment and other devices depending
upon the specific requirements of a particular system and project.
Client
Services Sold Through Our Systems Segment
We
provide our customers and partners with a variety of services, including system
design, energy efficiency, financial consulting and analysis, construction
management and maintenance and monitoring.
System
Design
We design
solar power systems taking into account the customer’s location, site conditions
and energy needs. During the preliminary design phase, we conduct a site audit
and building assessment for onsite generation feasibility and identify energy
efficiency savings opportunities. We model the performance of a proposed system
design taking into account variables such as local weather patterns, utility
rates and other relevant factors at the customer’s location. We also identify
necessary permits and design our systems to comply with applicable building
codes and other regulations.
Financial
Consulting and Analysis
We offer
financial consulting services to our customers and assist them in developing
funding strategies for solar power projects depending on a customer’s size, cash
flow and tax status. We have partnered with many financial companies and
organizations which provide project development financing and bonding for our
customers. To date, we have successfully arranged financing for clients ranging
from simple loans and tax-advantaged operating leases to long-term, multi-party
power purchase agreements.
Construction
Management
We offer
general contracting services and employ project managers to oversee all aspects
of system installation, including securing necessary permits and approvals.
Subcontractors, typically electricians and roofers, usually provide the
construction labor, tools and heavy equipment for solar system installation. We
have developed relationships with subcontractors in many target markets, and
require subcontractors to be licensed, carry appropriate insurance and adhere to
the local labor and payroll requirements. Our construction management services
include system testing, commissioning and management of utility network
interconnection.
Maintenance
and Monitoring
We also
offer post-installation services in support of our solar power systems,
including:
Operations
and Maintenance: Our systems have a design life in excess of 25 years. We
typically provide our customers with a one-, two-, five- or ten-year parts and
workmanship system warranty, after which the customer may extend the period
covered by our warranty for an additional fee. We also pass through to customers
long-term warranties from the original equipment manufacturers, or OEMs, of
certain system components. Warranties of 20 years from solar panel suppliers are
standard, while inverters typically carry a two-, five- or ten-year warranty. We
offer our customers a comprehensive suite of solar power system maintenance
services ranging from preventive maintenance to rapid-response outage
restoration and inverter repair. Our Standard Service Agreement includes
continuous remote monitoring, system performance reports, and a 24/7 technical
support line. Our Plus Level Service Agreement includes all of the Standard
Service features plus on-site preventive and corrective maintenance using
regionally-located field service technicians.
Monitoring:
We have developed a proprietary set of advanced monitoring applications built
upon the leading electric utility real-time monitoring platform. The monitoring
service continuously scans the operational status and performance of the solar
system and automatically identifies system outages and performance deficiencies
to our 24/7 monitoring technicians. If the monitoring technicians cannot
identify the cause of the problem within a predetermined response time, the
issue is escalated to our performance engineers for further analysis and
diagnostics. If the performance engineers cannot resolve the problem within the
service response time, the issue is escalated to our field service team to
resolve the problem at our customer’s facility. Customers can access historical
or daily system performance data through our customer website (www.sunpowermonitor.com).
Some customers choose to install electronic kiosks for flat-panel displays to
track performance information at their facility. We believe these displays
enhance our brand and educate the public and prospective customers about solar
power.
In 2008
we released the SunPower Monitoring System designed primarily for residential
customers. This system enables residential customers to view their daily,
monthly and annual solar energy production remotely via a web interface as well
as in their home with a dedicated display.
Energy
Efficiency Consulting and Related Services Sold Through Our Systems
Segment
In
addition to our solar power systems, we provide related energy efficiency
services designed to increase the total return on investment through an
integrated, seamless solution. We provide custom solar power generation and
demand side management solutions to minimize facility energy use and demand,
improve building operation controls and increase the comfort level of building
occupants.
Corporate
History
We were
originally incorporated in California in April 1985 by Dr. Richard Swanson
to develop and commercialize high-efficiency solar cell technologies. Cypress
Semiconductor Corporation, or Cypress, made a significant investment in SunPower
in 2002. In November 2004, Cypress acquired 100% ownership of all
outstanding shares of our capital stock, excluding unexercised warrants and
options. In November 2005, we reincorporated in Delaware, created two
classes of common stock and held the initial public offering, or IPO, of class A
common stock. After completion of our IPO, Cypress held all the outstanding
shares of our class B common stock. On September 29, 2008, Cypress
completed a spin-off of all of its shares of our class B common stock, in the
form of a pro rata dividend to the holders of record as of September 17, 2008 of
Cypress common stock. As a result, our class B common stock now trades publicly
and is listed on the Nasdaq Global Select Market, along with our class A common
stock.
Research
and Development
We engage
in extensive research and development efforts to improve solar cell efficiency,
enhance our Systems Segment products and reduce manufacturing cost and
complexity. Our research and development organization works closely with our
manufacturing facilities, our equipment suppliers and our customers to improve
our solar cell design and to lower cell, panel and system product manufacturing
and assembly costs. In addition, we have dedicated employees who work closely
with our current and potential suppliers of crystalline silicon, a key raw
material used in the manufacture of our solar cells, to develop specifications
that meet our standards and ensure the high quality we require, while at the
same time controlling costs.
We have
government contracts that enable us to more rapidly develop new technologies and
pursue additional research opportunities while helping to offset our research
and development expense. In the third quarter of 2007, we signed a Solar America
Initiative research and development agreement with the U.S. Department of Energy
in which we were awarded $10.8 million in the first budgetary period. Total
funding for the three-year effort is estimated to be $24.9 million. Our cost
share requirement under this program, including lower-tier subcontract awards,
is anticipated to be $28.1 million. Payments received under these contracts
offset our research and development expense by approximately 25%, 21% and 8% in
fiscal 2008, 2007 and 2006, respectively. Our research and development
expenditures, net of payments received under these contracts, were approximately
$21.5 million, $13.6 million and $9.7 million for fiscal 2008, 2007 and 2006,
respectively.
For more
information about these grants, including the government’s limited rights to use
technology developed as a result of such grants, please see “Item 1A: Risk Factors”
including “–Our reliance on
government programs to partially fund our research and development programs
could impair our ability to commercialize our solar power products and
services.”
Manufacturing
The solar
cell value chain starts with high purity silicon called polysilicon. Polysilicon
is created by refining quartz or sand. Polysilicon is melted and grown into
crystalline ingots by companies specializing in ingot growth, such as our joint
venture located in South Korea named Woongjin Energy Co., Ltd, or Woongjin
Energy. The ingots are sliced and the wafers are processed into solar cells in
our own manufacturing facilities and in a joint venture named First Philec Solar
Corporation, or First Philec Solar, located in the Philippines, and by other
vendors. We also purchase wafers and polysilicon from third-party vendors on a
purchase order or contract basis.
We
manufacture our solar cells through our subsidiary, SunPower Philippines
Manufacturing Limited, in two facilities located near Manila in the Philippines.
Our first facility, or FAB1, has 215,000 square feet and began operations in the
fall of 2004. We currently operate four solar cell manufacturing lines, with a
total rated manufacturing capacity of 108 megawatts per year at this FAB1. In
August 2006, we purchased a 344,000 square foot building in the Philippines, or
FAB2. This building is approximately 20 miles from FAB1 and was constructed to
house up to twelve solar cell manufacturing lines. FAB2 began operations in the
summer of 2007 and we currently operate eight solar cell manufacturing lines,
with a total rated manufacturing capacity of 306 megawatts per year at this
FAB2. By the end of 2009, we plan to operate 16 solar cell manufacturing lines
in total with an aggregate manufacturing capacity of 574 megawatts per year. In
addition, we plan to begin production in 2010 on the first line of
our planned third solar cell manufacturing facility, or FAB3, which will be
constructed in Malaysia. FAB3 will be constructed in two phases, with an
aggregate manufacturing capacity of more than 500 megawatts per year after the
completion of the first phase, and an expected aggregate manufacturing capacity
of more than 1 gigawatt per year when the second phase is
completed.
We
manufacture our solar panels at our solar panel assembly facility located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate seven solar panel manufacturing
lines with a rated manufacturing capacity of 210 megawatts of solar panels per
year.
Over the
past 15 years, we have developed a core competency in processing thin silicon
wafers. This proprietary semiconductor processing expertise involves specialized
equipment and facilities that we believe allow us to process thin wafers while
minimizing breakage and accurately controlling the effect of metallic
contaminants and other non-desirable process conditions.
We source
the balance of system components based on quality, performance and cost
considerations using solar cells and solar panels supplied internally as well as
from other third-party suppliers. We generally assemble proprietary components,
such as cementitious coatings and certain adhesive applications, while we
purchase generally available components from third-party suppliers. Certain of
our products, such as our PowerGuard® and SunTile® products, are assembled at
our or a third-party contractor’s assembly plant prior to shipment to the
project location. Other products such as our SunPower® Tracker and SunPower®
T-10 commercial roof tiles are field assembled with components shipped directly
from suppliers. We currently have the capacity to produce up to an aggregate of
twenty megawatts of our PowerGuard® and SunTile® products per year, depending on
product mix, in our California assembly plant or third-party contractor’s
assembly plant.
Supplier
Relationships
Crystalline
silicon is the leading commercial material for solar cells and is used in
several forms, including single-crystalline, or monocrystalline silicon,
multicrystalline, or polycrystalline silicon, ribbon and sheet silicon and
thin-layer silicon. We believe our supplier relationships and various short- and
long-term contracts will afford us the volume of material required to meet our
planned output. For more information about risks related to our crystalline
silicon, please see “Item 1A:
Risk Factors” including “– Limited competition among suppliers
has required us in some instances to enter into long-term, firm commitment
supply agreements that could result in excess or insufficient inventory and
place us at a competitive disadvantage.”
With
respect to suppliers for our Components Segment, we purchase polysilicon,
silicon ingots, inverters, solar panels and a balance of system components on
both a contracted and a purchase order basis. We have contracted with some of
our suppliers for multi-year supply agreements. Under such agreements, we have
annual minimum purchase obligations and in certain cases prepayment
obligations.
With
respect to suppliers for our Systems Segment, we are able to utilize solar
panels from various manufacturers depending on power, performance and cost
requirements for our construction projects. We historically partnered, and
intend to continue to partner, with solar cell and panel manufacturers that
offer the most advanced solar panel technologies and the highest quality
products.
Customers
Components
Customers
We
currently sell our solar power products to installers and resellers, including
our global dealer network. We sell our products in North America, Europe, Asia
and Australia, principally in regions where government incentives have
accelerated solar power adoption. We currently work with a number of customers
who have specific expertise and capabilities in a given market segment or
geographic region. As we expand our manufacturing capacity, we anticipate
developing additional customer relationships in other markets and geographic
regions to continue to decrease our customer concentration and
dependence.
We have four
components customers that each accounted for more than 10 percent of our total
revenue in fiscal 2006, and less than 10 percent of our total revenue in both
fiscal 2008 and 2007 as follows:
|
Year Ended
|
||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
||||
|
Significant
components customers:
|
||||||
|
Conergy
AG
|
*
|
*
|
25%
|
|||
|
Solon
AG
|
*
|
*
|
24%
|
|||
|
PowerLight**
|
n.a.
|
n.a.
|
16%
|
|||
|
General
Electric Company***
|
*
|
*
|
10%
|
|||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
International
sales comprise the majority of components revenue and represented approximately
67%, 64% and 68% of components revenue in fiscal 2008, 2007 and 2006,
respectively. We anticipate that a significant amount of our total revenue will
continue to be generated by sales to customers outside the United States. A
significant portion of our sales are denominated in Euros and we have entered
into foreign currency forward exchange and option contracts to protect against
an unfavorable U.S. dollar versus the Euro exchange rate. For more information
about risks related to currency fluctuations, please see “Item 1A: Risk Factors”
including “– We have significant international
activities and customers, and plan to continue these efforts, which subject us
to additional business risks, including logistical complexity and political
instability.” A table providing total revenue by geography for the
last three fiscal years is found in Note 17 to Consolidated Financial Statements
in "Item 8: Financial
Statements and Supplementary Data."
Systems
Customers
Our
systems customers include commercial and governmental entities, investors,
utilities, production home builders and home owners. We work with construction,
system integration and financing companies to deliver our solar power systems to
the end-users of electricity. In the United States, we often work with financing
companies that purchase solar power systems from us, and then sell solar
electricity generated from these systems under power purchase agreements to
end-users. Under power purchase agreements, the end-users typically pay the
financing companies over an extended period of time based on energy they consume
from the solar power systems, rather than paying for the full capital cost of
purchasing the solar power systems. Worldwide, more than 500 SunPower solar
power systems are commissioned or in construction, rated in the aggregate at
more than 400 megawatts of peak capacity. In addition, our new homes division
and our dealer network have deployed thousands of SunPower rooftop solar systems
to residential customers. We have solar power system projects completed or in
the process of being completed in various countries, including Germany, Italy,
Portugal, South Korea, Spain and the United States.
We
have two systems customers that each accounted for more than 10 percent of
our total revenue in each of fiscal 2008 and 2007 as follows:
|
Year Ended
|
|||||
|
December
28,
2008
|
December
30,
2007
|
||||
|
Significant
systems customers:
|
|||||
|
Naturener
Group
|
18%
|
*
|
|||
|
Sedwick
Corporate, S.L.
|
11%
|
*
|
|||
|
SolarPack
|
*
|
18%
|
|||
|
MMA
Renewable Ventures
|
*
|
16%
|
|||
|
*
|
denotes
less than 10% during the period
|
Domestic
and international systems sales represented approximately 38% and 62%,
respectively, of our systems revenue in fiscal 2008 and 51% and 49%,
respectively, of our systems revenue in fiscal 2007. Installations in California
and Spain accounted for 34% and 54%, respectively, of our systems revenue for
fiscal 2008. Installations in California, Nevada and Spain accounted for 24%,
22% and 46%, respectively, of our systems revenue for fiscal 2007. In June and
July 2008, we energized several large-scale solar power plants in Spain rated at
over 40 megawatts in the aggregate. In December 2007, we completed the
construction of an approximately 14 megawatt solar power plant at Nellis Air
Force Base in Nevada that currently represents our largest installed solar power
project in North America.
Marketing
and Sales
We market
and sell solar electric power technologies worldwide both through a direct sales
force and resellers, including our global dealer network. We have direct sales
personnel or representatives in Australia, Germany, Italy, Korea, Singapore,
Spain, Switzerland and the United States. And during fiscal 2008, we tripled the
size of our dealer network by adding more than 350 dealers worldwide.
Approximately 69%, 85% and 73% of our total revenue for fiscal 2008, 2007 and
2006, respectively, were derived through our direct sales force and sales
affiliates, with the remainder from resellers. We provide warranty coverage on
systems we sell through our direct sales force, sales affiliates and resellers.
To the extent we sell through resellers, we may provide system design and
support services while the resellers are responsible for construction,
maintenance and service.
Our
marketing programs include conferences and technology seminars, sales training,
public relations and advertising. Our marketing group is also responsible for
driving many qualified leads to support our sales teams lead generation efforts,
assessing the productivity of our lead pipeline, and measuring
marketing-generated leads to closed sales. We support our customers through our
field application engineering and customer support organizations. We have
marketing staff in San Jose and Richmond, California, United States, as well as
in Geneva, Switzerland. Please see Note 17 of Notes to our Consolidated
Financial Statements for information regarding our revenue by geographic
region.
Backlog
Components
Segment: Our solar cell, solar panel and inverter sales within the
Components Segment are typically ordered by customers under standard purchase
orders with relatively short delivery lead-times, generally within one to three
months. We have entered into long-term supply agreements with certain customers
that contain minimum firm purchase commitments. However, specific products that
are to be delivered and the related delivery schedules under these long-term
contracts are generally subject to revision by our customers.
Systems
Segment: Our systems revenue is primarily comprised of engineering,
procurement and construction, or EPC, projects which are governed by customer
contracts that require us to deliver functioning solar power systems. EPC
projects are generally completed within 6 to 36 months from the date of the
contract signing. In addition, our Systems Segment also derives revenue from
sales of certain solar power products and services that are smaller in scope
than an EPC project. Our Systems Segment backlog represents the uncompleted
portion of contracted and financed projects. For example, we have more than one
gigawatt of contingent customer orders, including our contract with PG&E to
design and build a 250 megawatt solar power plant in California. However,
this contract is contingent and is not yet a financed project, therefore, it is
excluded from backlog as of December 28, 2008. Our contract with FPL to
design and build two solar photovoltaic power plants totaling 35 megawatts in
Florida is a financed project and is included in backlog as of December 28,
2008. Our EPC
projects and contracts in our new homes group are often cancelable by our
customers under certain situations. In addition, systems project revenue
and related costs are often subject to delays or scope modifications based on
change orders agreed to with our customers, or changes in the estimated
construction costs to be incurred in completing the project.
Management
believes that backlog at any particular date is not necessarily a meaningful
indicator of future revenue for any particular period of time because our
backlog excludes contracts signed and completed in the same quarter and
contracts still subject to obtaining project financing. Backlog totaled
approximately $1,144 million and $778 million as of December 28, 2008 and
December 30, 2007, respectively. Approximately $450 million of our backlog at
December 28, 2008 is currently planned to be recognized as revenue during fiscal
2009.
Competition
The
market for solar electric power technologies is competitive and continually
evolving. We expect to face increased competition, which may result in price
reductions, reduced margins or loss of market share. Our solar power products
compete with a large number of competitors in the solar power market, including,
but not limited to, Evergreen Solar, Inc., First Solar, Inc., Q-Cells AG, Sanyo
Corporation, Sharp Corporation and Suntech Power Holdings Co., Ltd. We may also
face competition from some of our resellers, who may develop products internally
that compete with our product and service offerings, or who may enter into
strategic relationships with or acquire other existing solar power system
providers. To the extent that government funding for research and development
grants, customer tax rebates and other programs that promote the use of solar
and other renewable forms of energy are limited, we compete for such funds, both
directly and indirectly, with other renewable energy providers and
customers.
In
addition, universities, research institutions and other companies have brought
to market alternative technologies such as thin films and concentrators, which
compete with our technology in certain applications. Furthermore, the solar
power market in general competes with conventional fossil fuels supplied by
utilities and other sources of renewable energy such as wind, hydro,
biomass, concentrated solar power and emerging distributed generation
technologies such as micro-turbines, sterling engines and fuel cells. We believe
solar power has certain advantages when compared to these other power generating
technologies and offers a stable power price compared to utility network power,
which typically increases as fossil fuel prices increase. In addition, solar
power systems are deployed in many sizes and configurations and do not produce
air, water and noise emissions. Most other distributed generation technologies
create environmental impacts of some sort. The current high up-front cost of
solar relative to utility network power, however, is the primary market barrier
for on-grid applications.
In the
large-scale on-grid solar power systems market, we face direct competition from
a number of companies, including those that manufacture, distribute, or install
solar power systems as well as construction companies that have expanded into
the renewable sector. In addition, we will occasionally compete with distributed
generation equipment suppliers.
We
believe that the key competitive factors in the market for solar cells and solar
panels include:
|
|
•
|
levelized
cost of energy, or LCOE, an evaluation of the life-cycle energy costs and
life-cycle energy production;
|
|
|
•
|
power
efficiency and performance;
|
|
|
•
|
price;
|
|
|
•
|
aesthetic
appearance of solar cells and
panels;
|
|
|
•
|
strength
of distribution relationships; and
|
|
|
•
|
timeliness
of new product introductions.
|
The
principal elements of competition in the solar systems market include technical
expertise, experience, delivery capabilities, diversity of product offerings,
financing structures, marketing and sales, price, product performance, quality,
efficiency and reliability, and technical service and support. We believe that
we compete favorably with respect to each of these factors, although we may be
at a disadvantage in comparison to larger companies with broader product lines
and greater technical service and support capabilities and financial resources.
For more information about risks related to our competition, please see “Item 1A: Risk Factors”
including “– If we fail to successfully develop
and introduce new and enhanced products and services, we may not be able to
compete effectively, and our ability to generate revenues will
suffer.”
Intellectual
Property
We rely
on a combination of patent, copyright, trade secret, trademark and contractual
protections to establish and protect our proprietary rights. “SunPower” is our
registered trademark in countries throughout the world for use with solar cells,
solar panels and mounting systems. We also hold registered trademarks for
PowerLight®, PowerGuard®, PowerTracker® and SunTile® in certain countries. We
are seeking and will continue to seek registration of the “SunPower” trademark
and other trademarks in additional countries as we believe is appropriate. We
require our customers to enter into confidentiality and nondisclosure agreements
before we disclose any sensitive aspects of our solar cells, technology or
business plans, and we typically enter into proprietary information agreements
with employees and consultants.
Although
we apply for patents to protect our technology, our revenue is not dependent on
any particular patent we own. We currently own multiple patents and patent
applications which cover aspects of the technology in the solar cells and
mounting systems that we currently manufacture and market. Material patents that
relate to our systems products and services primarily relate to our rooftop
mounting products and ground-mounted tracking products. The remaining lifetimes
of such patents range from one to twenty years. We intend to continue assessing
appropriate opportunities for patent protection of those aspects of our
technology, designs, and methodologies and processes that we believe provide
significant competitive advantages to us, and for licensing opportunities of new
technologies relevant to our business. We additionally rely on trade secret
rights to protect our proprietary information and know-how. We employ
proprietary processes and customized equipment in our manufacturing
facilities.
For more
information about risks related to our intellectual property, please see “Item 1A: Risk Factors”
including “– We are
dependent on our intellectual property, and we may face intellectual property
infringement claims that could be time-consuming and costly to defend and could
result in the loss of significant rights.” and “– We rely substantially upon trade
secret laws and contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to compete and
generate revenue could suffer.” and “– We may not obtain sufficient
patent protection on the technology embodied in the solar cells or solar system
components we currently manufacture and market, which could harm our competitive
position and increase our expenses.”
Public
Policy Considerations
Different
policy mechanisms have been used by governments to accelerate the adoption of
solar power. Examples of customer-focused financial mechanisms include capital
cost rebates, performance-based incentives, feed-in tariffs, tax credits and net
metering. Capital cost rebates provide funds to customers based on the cost and
size of a customer’s solar power system. Performance-based incentives
provide funding to a customer based on the energy produced by their solar
system. Feed-in tariffs pay customers for solar power system generation based on
kilowatt-hours produced, at a rate generally guaranteed for a period of time.
Tax credits reduce a customer’s taxes at the time the taxes are due. In the
United States and other countries, net metering has often been used as a
supplemental program in conjunction with other policy mechanisms. Under net
metering, a customer can generate more energy than used, during which periods
the electricity meter will spin backwards. During these periods, the customer
“lends” electricity to the grid, retrieving an equal amount of power at a later
time. Net metering encourages customers to size their systems to match their
electricity consumption over a period of time, such as monthly or annually,
rather than limiting solar generation to matching customers’ instantaneous
electricity use.
In
addition to the mechanisms described above, new market development mechanisms to
encourage the use of renewable energy sources continue to emerge. For example,
many states in the United States have adopted renewable portfolio standards
which mandate that a certain portion of electricity delivered to customers come
from a set of eligible renewable energy resources. In certain developing
countries, governments are establishing initiatives to expand access to
electricity, including initiatives to support off-grid rural electrification
using solar power. For more information about risks related to public policies,
please see “Item 1A: Risk
Factors” including “– Existing regulations and policies
and changes to these regulations and policies may present technical, regulatory
and economic barriers to the purchase and use of solar power products, which may
significantly reduce demand for our products and services.”
Environmental
Regulations
We use,
generate and discharge toxic, volatile or otherwise hazardous chemicals and
wastes in our research and development, manufacturing and construction
activities. We are subject to a variety of foreign, federal, state and local
governmental laws and regulations related to the purchase, storage, use and
disposal of hazardous materials.
We
believe that we have all environmental permits necessary to conduct our business
and expect to obtain all necessary environmental permits for FAB3 and future
construction activities. We believe that we have properly handled our hazardous
materials and wastes and have appropriately remediated any contamination at any
of our premises. We are not aware of any pending or threatened environmental
investigation, proceeding or action by foreign, federal, state or local
agencies, or third-parties involving our current facilities. Any failure by us
to control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to substantial financial liabilities, operational
interruptions and adverse publicity, any of which could materially and adversely
affect our business, results of operations and financial condition.
Employees
As of
December 28, 2008, we had approximately 5,400 employees worldwide,
including approximately 540 employees located in the United States, 4,710
employees located in the Philippines and 150 employees located in other
countries. Of these employees, approximately 4,460 were engaged in
manufacturing, 150 employees in construction projects, 150 employees in research
and development, 470 employees in sales and marketing and 170 employees in
general and administrative. None of our employees are covered by a collective
bargaining agreement. We have never experienced a work stoppage and we believe
relations with our employees are good.
Available
Information
We make
available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 free of charge on our website at www.sunpowercorp.com, as soon as
reasonably practicable after they are electronically filed or furnished to the
Securities and Exchange Commission, or the SEC. Additionally, copies of
materials filed by us with the SEC may be accessed at the SEC’s Public Reference
Room at 100 F Street NE, Washington, D.C. or at the SEC’s website at
http://www.sec.gov. For information about the SEC’s Public Reference Room, the
public may contact 1-800-SEC-0330. Copies of material filed by us with the SEC
may also be obtained by writing to us at our corporate headquarters, SunPower
Corporation, Attention: Investor Relations, 3939 North First Street,
San Jose, California 95134, or by calling (408) 240-5500. The contents of our
website are not incorporated into, or otherwise to be regarded as a part of,
this Annual Report on Form 10-K.
ITEM 1A:
RISK
FACTORS
Our
operations and financial results are subject to various risks and uncertainties,
including risks related to our supply chain, sales channels including
availability of project financing, liquidity, operations, intellectual property,
and our debt and equity securities. Although we believe that we have identified
and discussed below the key risk factors affecting our business, there may be
additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may also adversely affect our
business, financial condition, results of operations, cash flows, and trading
price of our class A and class B common stock as well as our 1.25%
debentures and 0.75% debentures.
Risks
Related to Our Supply Chain
We
will continue to be dependent on a limited number of third-party suppliers for
certain raw materials and components for our products, which could prevent us
from delivering our products to our customers within required timeframes, which
could result in sales and installation delays, cancellations, liquidated damages
and loss of market share.
We rely
on a limited number of third-party suppliers for certain raw materials and
components for our solar cells and power systems such as polysilicon and
inverters. If we fail to develop or maintain our relationships with our limited
suppliers, we may be unable to manufacture our products or our products may be
available only at a higher cost or after a long delay, which could prevent us
from delivering our products to our customers within required timeframes and we
may experience order cancellation and loss of market share. To the extent the
processes that our suppliers use to manufacture components are proprietary, we
may be unable to obtain comparable components from alternative suppliers. In
addition, the current economic environment and credit markets could limit our
suppliers’ ability to raise capital if required to expand their production or
satisfy their operating capital requirements. As a result, they could be
unable to supply necessary raw materials, inventory and capital equipment to us
which we would require to support our planned sales operations which would in
turn negatively impact our sales volumes and cash flows. The failure of a
supplier to supply raw materials or components in a timely manner, or to supply
raw materials or components that meet our quality, quantity and cost
requirements, could impair our ability to manufacture our products or increase
their costs. If we cannot obtain substitute materials or components on a timely
basis or on acceptable terms, we could be prevented from delivering our products
to our customers within required timeframes, which could result in sales and
installation delays, cancellations, liquidated damages and loss of market share,
any of which could have a material adverse effect on our business and results of
operations.
As
polysilicon supply increases, the corresponding increase in the global supply of
solar cells and panels may cause substantial downward pressure on the prices of
such products, resulting in lower revenues and earnings.
The
scarcity of polysilicon during the past few years has resulted in the
underutilization of solar panel manufacturing capacity at many competitors or
potential competitors, particularly in China. If additional polysilicon
becomes available in the market over the next two years, solar panel production
globally could increase. Decreases in polysilicon pricing and increases in
solar panel production could each result in substantial downward pressure on the
price of solar cells and panels, including SunPower products. Such price
reductions could have a negative impact on our revenue and earnings, and
materially adversely affect our business and financial condition.
Limited
competition among suppliers has required us in some instances to enter into
long-term, firm commitment supply agreements that could result in excess or
insufficient inventory and place us at a competitive disadvantage.
Due to
the industry-wide shortage of polysilicon experienced during the past few years,
we have purchased polysilicon that we resell to third-party ingot and wafer
manufacturers who deliver wafers to us that we then use in the manufacturing of
our solar cells. Without sufficient polysilicon, some of those ingot and wafer
manufacturers would not be able to produce the wafers on which we rely. To match
our estimated customer demand forecasts and growth strategy for the next several
years, we have entered into multiple long-term supply agreements. Some
agreements provide for fixed or inflation-adjusted pricing, substantial
prepayment obligations, and firm purchase commitments that require us to pay for
the supply whether or not we accept delivery. If such agreements require us to
purchase more polysilicon, ingots or wafers than required to meet our actual
customer demand over time, the resulting excess inventory could materially and
negatively impact our results of operations. In addition, if the prices under
our long-term supply agreements result in our paying more for such supplies than
the current market prices available to our competitors, we may also be placed at
a competitive disadvantage, and our revenues could decline. However, if our
agreements provide insufficient inventory to meet customer demand, or if our
suppliers are unable or unwilling to provide us with the contracted quantities,
we may purchase additional supply at available market prices which could be
greater than expected and could materially and negatively impact our results of
operations. Such market prices could also be greater than prices paid by our
competitors, placing us at a competitive disadvantage and leading to a decline
in our revenue. Further, we face significant specific counterparty risk under
long-term supply agreements when dealing with suppliers without a long, stable
production and financial history. In the event any such supplier experiences
financial difficulties, it may be difficult or impossible, or may require
substantial time and expense, for us to recover any or all of our prepayments.
Any of the foregoing could materially harm our financial condition and results
of operations.
If
third-party manufacturers become unable or unwilling to sell their solar cells
and panels to us as a direct competitor in some markets, our business and
results of operations may be materially negatively affected.
We plan
to purchase a portion of our total product mix from third-party manufacturers of
solar cells and panels. Such products increase our inventory available for
sale to systems customers in some markets. However, such manufacturers may
be our direct competitors. If they are unable or unwilling to sell to us,
we may not have sufficient products available to sell to systems customers and
satisfy our sales commitments, thereby materially and negatively affecting our
business and results of operations.
Risks
Related to Our Sales Channels
The
execution of our growth strategy is dependent upon the continued availability of
third-party financing arrangements for our customers, and is affected by general
economic conditions.
The
general economy and limited availability of credit and liquidity could
materially and adversely affect our business and results of operations. Many
purchasers of our systems projects have entered into third-party arrangements to
finance their systems over an extended period of time while many end-customers
have chosen to purchase solar electricity under a power purchase agreement, or
PPA, with a financing company that purchases the system from us or our
authorized dealers. In addition, under our power purchase business model, we
often execute PPAs directly with the end-user customer purchasing solar
electricity, with the expectation that we will later assign the PPA to a
financier. Under such arrangements, the financier separately contracts with
us to build and acquire the solar system, and then sells the electricity to the
end-user customer under the assigned PPA. When executing PPAs with the
end-user customers, we seek to mitigate the risk that a financier will not be
available for the project by allowing termination of the PPA in such event
without penalty. However, we may not always be successful in negotiating
for penalty-free termination rights for failure to secure financing, and certain
end-user customers have required substantial financial penalties in exchange for
such rights. These structured finance arrangements are complex and may not be
feasible in many situations.
Due to
the general reduction in available credit to would-be borrowers and the poor
state of economies worldwide, customers may be unable or unwilling to finance
the cost of our products, or the parties that have historically provided this
financing may cease to do so, or only do so on terms that are substantially less
favorable for us or our customers, any of which could materially and adversely
affect our revenue and growth in all segments of our business. If economic
recovery is slow in the United States or elsewhere, we may experience decreases
in the demand for our solar power products, which may harm our operating
results. In addition, a rise in interest rates would likely increase our
customers’ cost of financing our products and could reduce their profits and
expected returns on investment in our products. Similarly, the general reduction
in available credit to would-be borrowers, the poor state of economies
worldwide, and the condition of housing markets worldwide, could delay or reduce
our sales of products to new homebuilders and authorized resellers. Collecting
payment from customers facing liquidity challenges may also be
difficult.
The
reduction, modification or elimination of government and economic incentives
could cause our revenue to decline and harm our financial results.
The
market for on-grid applications, where solar power is used to supplement a
customer’s electricity purchased from the utility network or sold to a utility
under tariff, depends in large part on the availability and size of government
mandates and economic incentives because, at present, the cost of solar power
exceeds retail electric rates in many locations. Such incentives vary by
geographic market. Various government bodies in many countries, most notably
Spain, the United States, Germany, Italy, South Korea, Canada, Japan, Portugal,
Greece, France and Australia, have provided incentives in the form of feed-in
tariffs, rebates, tax credits, renewable portfolio standards, and other
incentives and mandates to end-users, distributors, system integrators and
manufacturers of solar power products to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. Some of
these government mandates and economic incentives are scheduled to be reduced or
to expire, or could be eliminated altogether. Because our sales are into the
on-grid market, the reduction, modification or elimination of government
mandates and economic incentives in one or more of our customer markets would
materially and adversely affect the growth of such markets or result in
increased price competition, either of which could cause our revenue to decline
and harm our financial results.
Existing
regulations and policies and changes to these regulations and policies may
present technical, regulatory and economic barriers to the purchase and use of
solar power products, which may significantly reduce demand for our products and
services.
The
market for electricity generation products is heavily influenced by federal,
state and local government regulations and policies concerning the electric
utility industry in the U.S. and abroad, as well as policies promulgated by
electric utilities. These regulations and policies often relate to electricity
pricing and technical interconnection of customer-owned electricity generation,
and could deter further investment in the research and development of
alternative energy sources as well as customer purchases of solar power
technology, which could result in a significant reduction in the potential
demand for our solar power products. We anticipate that our solar power products
and their installation will continue to be subject to oversight and regulation
in accordance
- 12
-
with
federal, state and local regulations relating to construction, safety,
environmental protection, utility interconnection and metering, and related
matters. It is difficult to track the requirements of individual states and
design equipment to comply with the varying standards. Any new regulations or
policies pertaining to our solar power products may result in significant
additional expenses to us, our resellers and resellers’ customers, which could
cause a significant reduction in demand for our solar power
products.
We
may incur unexpected warranty and product liability claims that could materially
and adversely affect our financial condition and results of
operations.
In our
Components Segment, our current standard product warranty for our solar panels
includes a 10-year warranty period for defects in materials and workmanship and
a 20-year warranty period for declines in power performance as well as a
one-year warranty on the functionality of our solar cells. We believe our
warranty periods are consistent with industry practice. Due to the long warranty
period, we bear the risk of extensive warranty claims long after we have shipped
product and recognized revenue. Although we conduct accelerated testing of our
solar cells and have several years of experience with our all-back-contact cell
architecture, our solar panels have not and cannot be tested in an environment
simulating the 20-year warranty period and it is difficult to test for all
conditions that may occur in the field. We have sold solar cells since late
2004.
In our
Systems Segment, our current standard warranty for our solar power systems
differs by geography and end-customer application and includes either a 1-, 2-
or 5-year comprehensive parts and workmanship warranty, after which the customer
may typically extend the period covered by its warranty for an additional fee.
While we generally pass through manufacturer warranties we receive from our
suppliers to our customers, we are responsible for repairing or replacing any
defective parts during our warranty period, often including those covered by
manufacturers’ warranties. If the manufacturer disputes or otherwise fails to
honor its warranty obligations, we may be required to incur substantial costs
before we are compensated, if at all, by the manufacturer. Furthermore, our
warranties may exceed the period of any warranties from our suppliers covering
components, such as inverters, included in our systems. Due to the long warranty
period, we bear the risk of extensive warranty claims long after we have
completed a project and recognized revenues.
Any
increase in the defect rate of our products would cause us to increase the
amount of warranty reserves and have a corresponding negative impact on our
results of operations. Further, potential future product failures could cause us
to incur substantial expense to repair or replace defective products, and we
have agreed to indemnify our customers and our distributors in some
circumstances against liability from defects in our solar cells. A successful
indemnification claim against us could require us to make significant damage
payments. Repair and replacement costs, as well as successful indemnification
claims, could materially and negatively impact our financial condition and
results of operations.
Like
other retailers, distributors and manufacturers of products that are used by
customers, we face an inherent risk of exposure to product liability claims in
the event that the use of the solar power products into which our solar cells
and solar panels are incorporated results in injury. We may be subject to
warranty and product liability claims in the event that our solar power systems
fail to perform as expected or if a failure of our solar power systems results,
or is alleged to result, in bodily injury, property damage or other damages.
Since our solar power products are electricity producing devices, it is possible
that our products could result in injury, whether by product malfunctions,
defects, improper installation or other causes. In addition, since we only began
selling our solar cells and solar panels in late 2004 and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether or not product liability claims will be brought against
us in the future or the effect of any resulting negative publicity on our
business. Moreover, we may not have adequate resources in the event of a
successful claim against us. We have evaluated the potential risks we face and
believe that we have appropriate levels of insurance for product liability
claims. We rely on our general liability insurance to cover product liability
claims and have not obtained separate product liability insurance. However, a
successful warranty or product liability claim against us that is not covered by
insurance or is in excess of our available insurance limits could require us to
make significant payments of damages. In addition, quality issues can have
various other ramifications, including delays in the recognition of revenue,
loss of revenue, loss of future sales opportunities, increased costs associated
with repairing or replacing products, and a negative impact on our goodwill and
reputation, which could also adversely affect our business and operating
results.
If
we fail to successfully develop and introduce new and enhanced products and
services, we may not be able to compete effectively, and our ability to generate
revenues will suffer.
The solar
power market is characterized by continually changing technology requiring
improved features, such as increased efficiency and higher power output and
improved aesthetics. Technologies developed by our direct competitors, including
thin film solar panels, concentrating solar cells, solar thermal electric and
other solar technologies, may provide power at lower costs than our products. We
also face competition in some markets from other power generation sources,
including conventional fossil fuels, wind, biomass, and hydro. Our failure to
further refine our technology and develop and introduce new solar power products
could cause our products to become uncompetitive or obsolete, which could reduce
our market share and cause our sales to decline. This will require us to
continuously develop new solar power products and enhancements for existing
solar power products to keep pace with evolving industry standards, competitive
pricing and changing customer requirements. As we introduce new or enhanced
products or integrate new technology into our products, we will face risks
relating to such transitions
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including,
among other things, technical challenges, disruption in customers’ ordering
patterns, insufficient supplies of new products to meet customers’ demand,
possible product and technology defects arising from the integration of new
technology and a potentially different sales and support environment relating to
any new technology. Our failure to manage the transition to newer products or
the integration of newer technology into our products could adversely affect our
business’ operating results and financial condition.
A
limited number of customers are expected to continue to comprise a significant
portion of our revenues and any decrease in revenue from these customers could
have a significant adverse effect on us.
Even
though we expect our customer base to increase and our revenue streams to
diversify, a substantial portion of our net revenues could continue to depend on
sales to a limited number of customers and the loss of sales to or inability to
collect from these customers would have a significant negative impact on our
business. Our agreements with these customers may be cancelled if we fail to
meet certain product specifications or materially breach the agreement or in the
event of bankruptcy, and our customers may seek to renegotiate the terms of
current agreements or renewals. In addition, the failure by any significant
customer to pay for orders, whether due to liquidity issues or otherwise, could
materially and negatively affect our results of operations.
We
generally do not have long-term agreements with our customers and accordingly
could lose customers without warning, which could cause our operating results to
fluctuate.
In our
Components Segment, our solar cells and solar panel products are generally not
sold pursuant to long-term agreements with customers, but instead are sold on a
purchase order basis. In our Systems Segment, we typically contract to perform
large projects with no assurance of repeat business from the same customers in
the future. Although we believe that cancellations on our purchase orders to
date have been insignificant, our customers may cancel or reschedule purchase
orders with us on relatively short notice. Cancellations or rescheduling of
customer orders could result in the delay or loss of anticipated sales without
allowing us sufficient time to reduce, or delay the incurrence of, our
corresponding inventory and operating expenses. In addition, changes in
forecasts or the timing of orders from these or other customers expose us to the
risks of inventory shortages or excess inventory. These circumstances, in
addition to the completion and non-repetition of large systems projects,
variations in average selling prices, changes in the relative mix of sales of
components versus system products, and the fact that our supply agreements are
generally long-term in nature and many of our other operating costs are fixed,
in turn could cause our operating results to fluctuate and may result in a
material adverse effect in our business.
Our
Systems Segment could be adversely affected by seasonal trends and construction
cycles.
Our
Systems Segment is subject to significant industry-specific seasonal
fluctuations. Its sales have historically reflected these seasonal trends with
the largest percentage of total revenues being realized during the last two
calendar quarters. Low seasonal demand normally results in reduced shipments and
revenues in the first two calendar quarters. There are various reasons for this
seasonality, mostly related to economic incentives and weather patterns. For
example, in European countries with feed-in tariffs, the construction of solar
power systems may be concentrated during the second half of the
calendar year, largely due to the annual reduction of the applicable minimum
feed-in tariff and the fact that the coldest winter months are January through
March. In the United States, customers will sometimes make purchasing decisions
towards the end of the year in order to take advantage of tax credits or for
other budgetary reasons. In addition, sales in the new home development
market are often tied to construction market demands which tend to follow
national trends in construction, including declining sales during cold weather
months.
The competitive
environment in which our systems business operates often requires us to
undertake post-sale customer obligations, which could materially and adversely
affect our financial condition and results of operations if our post-sale
customer obligations are more costly than expected.
We are
often required as a condition of financing or at the request of our end customer
to undertake certain post-sale obligations such as:
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System
output performance guaranties;
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System
maintenance;
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Liquidated
damage payments or customer termination rights if the system we are
constructing is not commissioned within specified timeframes or other
construction milestones are not
achieved;
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Guaranties
of certain minimum residual value of the system at specified future dates;
and
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System
put-rights whereby we could be required to buy-back a customer’s system at
fair value on specified future
dates.
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Such
financing arrangements and post-sale obligations involve complex accounting
analyses and judgments regarding the timing of revenue and expense recognition
and in certain situations these factors may require us to defer revenue
recognition until projects are completed, which could adversely affect revenue
and profits in a particular period.
Risks
Related to Our Liquidity
Due
to the general economic environment and other factors, we may be unable to
generate sufficient cash flows or obtain access to external financing necessary
to fund our operations and make adequate capital investments as
planned.
We
anticipate that our expenses will increase substantially in the foreseeable
future. To develop new products, support future growth, achieve operating
efficiencies and maintain product quality, we must make significant capital
investments in manufacturing technology, facilities and capital equipment,
research and development, and product and process technology. We also anticipate
increased costs as we expand our manufacturing operations, hire additional
personnel, pay more or make advance payments for raw material, especially
polysilicon, increase our sales and marketing efforts, invest in joint
ventures and acquisitions, and continue our research and development
efforts with respect to our products and manufacturing technologies. We
expect total capital expenditures in the range of $350 million to $400
million in 2009 as we continue to increase our solar cell and solar panel
manufacturing capacity. These expenditures could be greater if we decide to
bring capacity on line more rapidly.
We
believe that our current cash and cash equivalents, cash generated from
operations, funds available under our facility agreement with the Malaysian
government, and, if necessary, borrowings under our credit agreement with Wells
Fargo Bank, N.A., or Wells Fargo, and/or potential availability of future
sources of funding will be sufficient to fund our capital and operating
expenditures over the next 12 months. The
uncollateralized revolving credit line and uncollateralized letter of credit
subfeature of the Wells Fargo credit agreement are scheduled to expire on July
3, 2009, and we are negotiating another amendment to further extend the
expiration date. If we do not agree to amend the credit agreement to futher
extend the deadline, all borrowings under the uncollateralized revolving credit
line must be repaid by July 3, 2009, and all letters of credit issued under the
uncollateralized letter of credit subfeature expire on or before July 3, 2009
unless we provide by such date collateral in the form of cash or cash
equivalents in the aggregate amount available to be drawn under letters of
credit outstanding at such time. Our cash flows from operations depend
primarily on the volume of components sold and systems installed, average
selling prices, per unit manufacturing costs and other operating
costs.
However,
if our financial results or operating plans change from our current assumptions,
or if the holders of our outstanding convertible debentures elect to convert the
debentures into cash or cash and shares of class A common stock, we may not have
sufficient resources to support our business plan or pay cash in connection with
the redemption of outstanding debentures. If our capital resources are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity securities or debt securities or obtain other debt
financing; although, the current economic environment could also limit our
ability to raise capital by issuing new equity or debt securities on acceptable
terms, and lenders may be unwilling to lend funds on acceptable terms that would
be required to supplement cash flows to support operations. Further,
following the spin-off of our shares by Cypress on September 29, 2008, our
ability to issue equity for financing purposes is subject to limits as described
in “Our agreements with
Cypress require us to indemnify Cypress for certain tax liabilities. These
indemnification obligations and related contractual restrictions may limit our
ability to obtain additional financing, participate in future acquisitions or
pursue other business initiatives.” We may also seek to sell assets,
reduce or delay capital investments, or refinance or restructure our
debt.
There can
be no assurance that we will be able to generate sufficient cash flows, find
other sources of capital or access capital markets to fund our operations and
projects, make adequate capital investments to remain competitive in terms of
technology development and cost efficiency. If adequate funds and alternative
resources are not available on acceptable terms, our ability to fund our
operations, develop and expand our manufacturing operations and
distribution network, maintain our research and development efforts or
otherwise respond to competitive pressures would be significantly impaired. Our
inability to do the foregoing could have a material adverse effect on our
business and results of operations.
If the recent
credit market conditions continue or worsen, they could have a material adverse
impact on our investment portfolio.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
During fiscal 2008, the net asset value of the Reserve Primary Fund and the
Reserve International Liquidity Fund fell below $1.00. We had $8.2 million
invested in the Reserve Funds on December 28, 2008, and we have estimated our
loss to be approximately $1.0 million based on an evaluation of the fair value
of the securities held by the Reserve Funds and the net asset value that was
last published by the Reserve Funds before the funds suspended
redemptions.
While we
expect to receive substantially all of our current holdings in the Reserve Funds
within the next nine months, it is possible we may encounter difficulties in
receiving distributions given the current credit market conditions. If market
conditions were to deteriorate even further such that the current fair value
were not achievable, we could realize additional losses in our holdings with the
Reserve Funds and distributions could be further delayed. There can be no
assurance that our other investments, particularly in this unfavorable market
and economic environment, will not face similar risks of loss.
Additionally,
beginning in February 2008, the auction rate securities market experienced a
significant increase in the number of failed auctions, resulting from a lack of
liquidity, which occurs when sell orders exceed buy orders, and does not
necessarily signify a default by the issuer. Of the $26.1 million invested in
auction rate securities on December 28, 2008, we have estimated the loss to be
approximately $2.5 million and we recorded an impairment charge of $2.5
million in “Other, net” in our
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Consolidated
Statements of Operations thereby establishing a new cost basis of $23.6 million
for the auction rate securities. All five auction rate securities invested
in at December 28, 2008 have failed to clear at auctions. For failed auctions,
we continue to earn interest on these investments at the maximum contractual
rate as the issuer is obligated under contractual terms to pay penalty rates
should auctions fail. Even if we need to access these funds, we will not be able
to do so until a future auction is successful, the issuer redeems the
securities, a buyer is found outside of the auction process, or the securities
mature. If these auction rate securities are unable to successfully clear at
future auctions or issuers do not redeem the securities, we may be required to
further adjust the carrying value of the securities and record an impairment
charge which could materially adversely impact our results of operations and
financial condition.
If our
investment portfolio decreases in value or if we are unable to access funds held
as auction rate securities, we may have insufficient liquidity to fund our
planned operations and capital requirements, which may materially and negatively
affect our financial condition and results of operations.
Our
current tax holidays in the Philippines will expire within the next several
years.
We
currently benefit from income tax holiday incentives in the Philippines in
accordance with our subsidiary’s registration with the Philippine Economic Zone
Authority, which provide that we pay no income tax in the Philippines. Our
current income tax holidays expire within the next several years beginning in
2010, and we intend to apply for extensions and renewals upon expiration.
However, these tax holidays may or may not be extended. We believe that as our
Philippine tax holidays expire, (a) gross income attributable to activities
covered by our Philippine Economic Zone Authority registrations will be taxed at
a 5% preferential rate, and (b) our Philippine net income attributable to
all other activities will be taxed at the statutory Philippine corporate income
tax rate, currently 32%. An increase in our tax liability could materially
and negatively affect our financial condition and results of
operations.
Because
we self-insure for certain indemnities we have made to our officers and
directors, potential claims could materially and negatively impact our financial
condition and results of operations.
Our
certificate of incorporation, by-laws and indemnification agreements require us
to indemnify our officers and directors for certain liabilities that may arise
in the course of their service to us. We primarily self-insure with respect to
potential indemnifiable claims. Although we have insured our officers and
directors against certain potential third-party claims for which we are legally
or financially unable to indemnify them, we intend to primarily self-insure with
respect to potential third-party claims which give rise to direct liability to
such third-party or an indemnification duty on our part. If we were required to
pay a significant amount on account of these liabilities for which we
self-insure, our business, financial condition and results of operations could
be materially harmed.
Our
substantial indebtedness and other contractual commitments could adversely
affect our business, financial condition and results of operations, as well as
our ability to meet any of our payment obligations under the debentures and our
other debt.
We
currently have a significant amount of debt and debt service requirements that
could have material consequences on our future operations,
including:
• making
it more difficult for us to meet our payment and other obligations under the
debentures and our other outstanding debt;
• resulting
in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default
could result in all of our debt becoming immediately due and
payable;
• reducing
the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and limiting our ability to
obtain additional financing for these purposes;
• subjecting
us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under our new
credit facility;
• limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and
the general economy; and
• placing
us at a competitive disadvantage compared to our competitors that have less debt
or are less leveraged.
Any of
the above-listed factors could have an adverse effect on our business, financial
condition and results of operations and our ability to meet our payment
obligations under the debentures and our other debt. In addition, we also have
significant contractual commitments for the purchase of polysilicon, some of
which involve prepayments, and we may enter into additional, similar long-term
supply agreements in the future. Further, if the holders of our outstanding
debentures convert their debentures, the principal amount must be settled in
cash and to the extent that the conversion obligation exceeds the principal
amount of any
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debentures
converted, we must satisfy the remaining conversion obligation of the 1.25%
debentures in shares of our class A common stock, and we maintain the right to
satisfy the remaining conversion obligation of the 0.75% debentures in shares of
our class A common stock or cash. During the fourth quarter of fiscal 2008,
holders of $1.4 million in aggregate principal amount of the 1.25% debentures
converted their debentures. Future conversions could materially and adversely
affect our liquidity and our ability to meet our payment obligations under our
debt.
Our
credit agreements contain covenant restrictions that may limit our ability to
operate our business.
We may be
unable to respond to changes in business and economic conditions, engage in
transactions that might otherwise be beneficial to us, and obtain additional
financing, if needed because our credit agreement with Wells Fargo and facility
agreement with the Government of Malaysia contain, and any of our other future
debt agreements may contain, covenant restrictions that limit our ability to,
among other things:
• incur
additional debt, assume obligations in connection with letters of credit, or
issue guarantees;
• create
liens;
• make
certain investments or acquisitions;
• enter
into transactions with our affiliates;
• sell
certain assets;
• redeem
capital stock or make other restricted payments;
• declare
or pay dividends or make other distributions to stockholders; and
• merge
or consolidate with any person.
Our
ability to comply with these covenants is dependent on our future performance,
which will be subject to many factors, some of which are beyond our control,
including prevailing economic conditions. In addition, our failure to comply
with these covenants could result in a default under the debentures and our
other debt, which could permit the holders to accelerate such debt. If any of
our debt is accelerated, we may not have sufficient funds available to repay
such debt, which could materially and negatively affect our financial condition
and results of operation.
Risks
Related to Our Operations
We
may not be able to increase or sustain our recent growth rate, and we may not be
able to manage our future growth effectively.
We may
not be able to continue to expand our business or manage future growth. We plan
to significantly increase our production capacity between 2009 and 2010, which
will require successful execution of
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expanding
our existing manufacturing facilities and developing new manufacturing
facilities, which would increase our fixed costs and, if such facilities
are underutilized, would negatively impact our results of
operations;
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ensuring
delivery of adequate polysilicon and
ingots;
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developing
more efficient wafer-slicing
methods;
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enhancing
our customer resource management and manufacturing management
systems;
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implementing
and improving additional and existing administrative, financial and
operations systems, procedures and controls, including the need to update
and integrate our financial internal control systems in SP Systems and in
our Philippines facility with those of our San Jose, California
headquarters;
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hiring
additional employees;
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expanding
and upgrading our technological
capabilities;
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manage
multiple relationships with our customers, suppliers and other
third-parties;
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maintaining
adequate liquidity and financial resources;
and
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continuing
to increase our revenues from
operations.
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Our
recent expansion has placed, and our planned expansion and any other future
expansion will continue to place, a significant strain on our management,
personnel, systems and resources. Expanding our manufacturing facilities or
developing facilities may be delayed by difficulties such as unavailability of
equipment or supplies or equipment malfunction. Ensuring delivery of adequate
polysilicon and ingots is subject to many market risks including scarcity,
significant price fluctuations and competition. Maintaining adequate liquidity
is dependent upon a variety of factors including continued revenues from
operations and compliance with our indentures and credit agreements. In
addition, following the spin-off of our shares by Cypress on September 29, 2008,
our ability to issue equity for financing purposes will be restricted by our tax
sharing agreement with Cypress. If we are unsuccessful in any of these areas, we
may not be able to achieve our growth strategy and increase production capacity
as planned during the foreseeable future. If we are unable to manage our growth
effectively, we may not be able to take advantage of market opportunities,
develop new solar cells and other products, satisfy customer requirements,
execute our business plan or respond to competitive pressures.
We
have significant international activities and customers, and plan to continue
these efforts, which subject us to additional business risks, including
logistical complexity and political instability.
In fiscal
2008, 2007 and 2006, a substantial portion of our sales was made to customers
outside of the United States, and a substantial portion of our supply agreements
is with supply and equipment vendors located outside of the United States.
Historically, we have had significant sales in Austria, Germany, Italy, Spain
and South Korea. Currently our solar cell production lines are located at our
manufacturing facilities in the Philippines, and we plan to construct another
manufacturing facility in Malaysia. In addition, a majority of our assembly
functions have historically been conducted by a third-party subcontractor in
China. Risks we face in conducting business internationally
include:
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multiple,
conflicting and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements and other
government approvals, permits and
licenses;
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difficulties
and costs in staffing and managing foreign operations as well as cultural
differences;
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potentially
adverse tax consequences associated with our permanent establishment of
operations in more countries;
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relatively
uncertain legal systems, including potentially limited protection for
intellectual property rights, and laws, regulations and policies which
impose additional restrictions on the ability of foreign companies to
conduct business in certain countries or otherwise place them at a
competitive disadvantage in relation to domestic
companies;
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inadequate
local infrastructure and developing telecommunications
infrastructures;
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financial
risks, such as longer sales and payment cycles and greater difficulty
collecting accounts receivable;
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currency
fluctuations and government-fixed foreign exchange rates and the effects
of currency hedging activity or inability to hedge currency fluctuations;
and
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political
and economic instability, including wars, acts of terrorism, political
unrest, boycotts, curtailments of trade and other business
restrictions.
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If we are
unable to successfully manage any such risks, any one or more could materially
and negatively affect our business, financial condition and results of
operations.
Our
operating results will be subject to fluctuations and are inherently
unpredictable.
To
maintain our profitability, we will need to generate and sustain higher revenue
while maintaining reasonable cost and expense levels. We do not know if our
revenue will grow, or if it will grow sufficiently to outpace our expenses,
which we expect to increase as we expand our manufacturing capacity. We may not
be able to sustain or increase profitability on a quarterly or an annual basis.
Our quarterly revenue and operating results will be difficult to predict and
have in the past fluctuated from quarter to quarter. In particular, our Systems
Segment is difficult to forecast and is susceptible to large fluctuations in
financial results. The amount, timing and mix of sales of our Systems Segment,
often for a single medium or large-scale project, may cause large fluctuations
in our revenue and other financial results. Further, our revenue mix of high
margin material sales versus lower margin projects in the Systems Segment can
fluctuate dramatically quarter to quarter, which may adversely affect our
revenue and financial results in any given period. Finally, our ability to
meet project completion schedules for an individual project and the
corresponding revenue impact under the percentage-of-completion method of
recognizing revenue, may similarly cause large fluctuations in our revenue and
other financial results. This may cause us to miss any future guidance announced
by us.
We base
our planned operating expenses in part on our expectations of future revenue,
and a significant portion of our expenses will be fixed in the short-term. If
revenue for a particular quarter is lower than we expect, we likely will be
unable to proportionately reduce our operating expenses for that quarter, which
would harm our operating results for that quarter. This may cause us to miss any
guidance announced by us.
If
we experience interruptions in the operation of our solar cell production lines
or are unable to add additional production lines, it would likely result in
lower revenue and earnings than anticipated.
We
currently have twelve solar cell manufacturing lines in production which are
located at our manufacturing facilities in the Philippines. If our current or
future production lines were to experience any problems or downtime, we would be
unable to meet our production targets and our business would suffer. If any
piece of equipment were to break down or experience downtime, it could cause our
production lines to go down. We have started operations in our second solar cell
manufacturing facility nearby our existing facility in the Philippines and we
plan to construct another manufacturing facility in Malaysia. This expansion has
required and will continue to require significant management attention, a
significant investment of capital and substantial engineering expenditures and
is subject to significant risks including:
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we
may experience cost overruns, delays, equipment problems and other
operating difficulties;
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we
may experience difficulties expanding our processes to larger production
capacity;
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our
custom-built equipment may take longer and cost more to engineer than
planned and may never operate as designed;
and
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we
are incorporating first-time equipment designs and technology
improvements, which we expect to lower unit capital and operating costs,
but this new technology may not be
successful.
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If we
experience any of these or similar difficulties, we may be unable to complete
the addition of new production lines on schedule in order to expand our
manufacturing facilities and our manufacturing capacity could be substantially
constrained. If this were to occur, our per-unit manufacturing costs would
increase, we would be unable to increase sales or gross margins as planned and
our earnings would likely be materially impaired.
If
we do not achieve satisfactory yields or quality in manufacturing our solar
cells, our sales could decrease and our relationships with our customers and our
reputation may be harmed.
The
manufacture of solar cells is a highly complex process. Minor deviations in the
manufacturing process can cause substantial decreases in yield and in some
cases, cause production to be suspended or yield no output. We have from time to
time experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
process technologies or equipment. As we expand our manufacturing capacity and
bring additional lines or facilities into production, we may experience lower
yields initially as is typical with any new equipment or process. We also expect
to experience lower yields as we continue the initial migration of our
manufacturing processes to thinner wafers. If we do not achieve planned yields,
our product costs could increase, and product availability would decrease
resulting in lower revenues than expected.
Additionally,
products as complex as ours may contain undetected errors or defects, especially
when first introduced. For example, our solar cells and solar panels may contain
defects that are not detected until after they are shipped or are installed
because we cannot test for all possible scenarios. These defects could cause us
to incur significant re-engineering costs, divert the attention of our
engineering personnel from product development efforts and significantly affect
our customer relations and business reputation. If we deliver solar cells or
solar panels with errors or defects, including cells or panels of third-party
manufacturers, or if there is a perception that such solar cells or solar panels
contain errors or defects, our credibility and the market acceptance and sales
of our products could be harmed.
We
obtain capital equipment used in our manufacturing process from sole suppliers
and if this equipment is damaged or otherwise unavailable, our ability to
deliver products on time will suffer, which in turn could result in order
cancellations and loss of revenue.
Some of
the capital equipment used in the manufacture of our solar power products and in
our wafer-slicing operations have been developed and made specifically for us,
is not readily available from multiple vendors and would be difficult to repair
or replace if it were to become damaged or stop working. If any of these
suppliers were to experience financial difficulties or go out of business, or if
there were any damage to or a breakdown of our manufacturing or wafer-slicing
equipment at a time when we are manufacturing commercial quantities of our
products, our business would suffer. In addition, a supplier’s failure to supply
this equipment in a timely manner, with adequate quality and on terms acceptable
to us, could delay our capacity expansion of our manufacturing facility and
otherwise disrupt our production schedule or increase our costs of
production.
We
depend on a third-party subcontractor in China to assemble a significant
portion of our solar cells into solar panels and any failure to obtain
sufficient assembly and test capacity could significantly delay our ability to
ship our solar panels and damage our customer relationships.
Historically,
we have relied on Jiawei SolarChina Co., Ltd., a third-party subcontractor in
China, to assemble a significant portion of our solar cells into solar
panels and perform panel testing and to manage packaging, warehousing and
shipping of our solar panels. We do not have a long-term agreement with Jiawei
and we typically obtain its services based on short-term purchase orders that
are generally aligned with timing specified by our customers’ purchase orders
and our sales forecasts. As a result of outsourcing a significant portion of
this final step in our production, we face several significant risks, including
limited control over assembly and testing capacity, delivery schedules, quality
assurance, manufacturing yields and production costs. If the operations of
Jiawei were disrupted or its financial stability impaired, or if it were unable
or unwilling to devote capacity to our solar panels in a timely manner, our
business would suffer as we may be unable to produce finished solar panels on a
timely basis. We also risk customer delays resulting from an inability to move
module production to an alternate provider, and it may not be possible to obtain
sufficient capacity or comparable production costs at another facility in a
timely manner. In addition, migrating our design methodology to a new
third-party subcontractor or to a captive panel assembly facility could involve
increased costs, resources and development time, and utilizing additional
third-party subcontractors could expose us to further risk of losing control
over our intellectual property and the quality of our solar panels. Further, we
supply inventory to Jiawei and bear the risk of loss, theft or damage to our
inventory while it is held in its facilities. Any reduction in the supply of
solar panels could impair our revenue by significantly delaying our ability to
ship products and potentially damage our relationships with new and existing
customers.
We
established a captive solar panel assembly facility, and, if this panel
manufacturing facility is unable to produce high quality solar panels at
commercially reasonable costs, our revenue growth and gross margin could be
adversely affected.
We
currently run seven solar panel assembly lines in the Philippines. This factory
commenced commercial production during the fourth quarter of 2006. Much of the
manufacturing equipment and technology in this factory is new and ramping to
achieve their full rated capacity. In the event that this factory is unable to
ramp production with commercially reasonable yields and competitive production
costs, our anticipated revenue growth and gross margin will be adversely
affected.
Our
Systems Segment acts as the general contractor for our customers in connection
with the installations of our solar power systems and is subject to risks
associated with construction, cost overruns, delays and other contingencies tied
to performance bonds and letters of credit, which could have a material adverse
effect on our business and results of operations.
Our
Systems Segment acts as the general contractor for our customers in connection
with the installation of our solar power systems. All essential costs are
estimated at the time of entering into the sales contract for a particular
project, and these are reflected in the overall price that we charge our
customers for the project. These cost estimates are preliminary and may or may
not be covered by contracts between us or the other project developers,
subcontractors, suppliers and other parties to the project. In addition, we
require qualified, licensed subcontractors to install most of our systems.
Shortages of such skilled labor could significantly delay a project or otherwise
increase our costs. Should miscalculations in planning a project or defective or
late execution occur, we may not achieve our expected margins or cover our
costs. Also, some systems customers require performance bonds issued by a
bonding agency or letters of credit issued by financial institutions. Due to the
general performance risk inherent in construction activities, it has become
increasingly difficult recently to secure suitable bonding agencies willing to
provide performance bonding, and obtaining letters of credit requires adequate
collateral because we have not obtained a credit rating. In the event we are
unable to obtain bonding or sufficient letters of credit, we will be unable to
bid on, or enter into, sales contracts requiring such bonding.
In
addition, some of our larger systems customers require that we pay substantial
liquidated damages for each day or other period its solar installation is not
completed beyond an agreed target date, up to and including the return of the
entire project sale price. This is particularly true in Europe, where long-term,
fixed feed-in tariffs available to investors are typically set during a
prescribed period of project completion, but the fixed amount declines over time
for projects completed in subsequent periods. We face material financial
penalties in the event we fail to meet the completion deadlines, including but
not limited a full refund of the contract price paid by the customers. In
certain cases we do not control all of the events which could give rise to these
penalties, such as reliance on the local utility to timely complete electrical
substation construction.
Furthermore,
investors often require that the solar power system generate specified levels of
electricity in order to maintain their investment returns, allocating
substantial risk and financial penalties to us if those levels are not achieved,
up to and including the return of the entire project sale price. Also, our
customers often require protections in the form of conditional payments, payment
retentions or holdbacks, and similar arrangements that condition its future
payments on performance. Delays in solar panel or other supply shipments, other
construction delays, unexpected performance problems in electricity generation
or other events could cause us to fail to meet these performance criteria,
resulting in unanticipated and severe revenue and earnings losses and financial
penalties. Construction delays are often caused by inclement weather, failure to
timely receive necessary approvals and permits, or delays in obtaining necessary
solar panels, inverters or other materials. Additionally, we sometimes purchase
land in connection with project development and assume the risk of project
completion. All such risks could have a material adverse effect on our business
and results of operations.
We may be unable
to achieve our goal of reducing the cost of installed solar systems by 50
percent by 2012, which may negatively impact our ability to sell our products in
a competitive environment, resulting in lower revenues, gross margins and
earnings.
To reduce
the cost of installed solar systems by 50 percent by 2012, as compared against
the cost in 2006, we will have to achieve cost savings across the entire value
chain from designing to manufacturing to distributing to selling and ultimately
to installing solar systems. We have identified specific areas of potential
savings and are pursuing targeted goals. However, such cost savings are
dependent upon decreasing silicon prices and lowering manufacturing costs. In
addition, we continue to explore cost effective methods of installing solar
systems. If we are unsuccessful in our efforts to reduce the cost of installed
solar systems by 50 percent by 2012, our revenues, gross margins and earnings
may be negatively impacted in the competitive environment. Such risks would be
exacerbated if governmental and fiscal incentives are reduced, or if these lower
prices have been assumed in connection with our sales commitments and we are
then unable to realize the expected reduction in cost of revenues, or if an
increase in the global supply of solar cells and solar panels causes substantial
downward pressure on prices of our products.
Acquisitions
of other companies or investments in joint ventures with other companies could
materially and adversely affect our financial condition and results of
operations, and dilute our stockholders’ equity.
To
increase our business and maintain our competitive position, we may acquire
other companies or engage in joint ventures in the future. Acquisitions and
joint ventures involve a number of risks that could harm our business and result
in the acquired business or joint venture not performing as expected,
including:
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insufficient
experience with technologies and markets in which the acquired business is
involved, which may be necessary to successfully operate and integrate the
business;
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problems
integrating the acquired operations, personnel, technologies or products
with the existing business and
products;
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diversion
of management time and attention from the core business to the acquired
business or joint venture;
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potential
failure to retain key technical, management, sales and other personnel of
the acquired business or joint
venture;
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difficulties
in retaining relationships with suppliers and customers of the acquired
business, particularly where such customers or suppliers compete with
us;
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reliance
upon joint ventures which we do not
control;
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subsequent
impairment of the acquired assets, including intangible assets;
and
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assumption
of liabilities including, but not limited to, lawsuits, tax examinations,
warranty issues, etc.
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Additionally,
we may decide that it is in our best interests to enter into acquisitions or
joint ventures that are dilutive to earnings per share or that negatively impact
margins as a whole. Acquisitions or joint ventures could also require investment
of significant financial resources and require us to obtain additional equity
financing, which may dilute our stockholders’ equity, or require us to incur
additional indebtedness. Further, following the spin-off of our shares by
Cypress on September 29, 2008, our ability to issue equity, including to acquire
companies or assets, is subject to limits as described in “Our agreements with Cypress require
us to indemnify Cypress for certain tax liabilities. These indemnification
obligations and related contractual restrictions may limit our ability to obtain
additional financing, participate in future acquisitions or pursue other
business initiatives.” To the extent these limits prevent us from
pursuing acquisitions or investments that we would otherwise pursue, our growth
and strategy could be impaired.
To the
extent that we invest in upstream suppliers or downstream channel capabilities,
we may experience competition or channel conflict with certain of our existing
and potential suppliers and customers. Specifically, existing and potential
suppliers and customers may perceive that we are competing directly with them by
virtue of such investments and may decide to reduce or eliminate their supply
volume to us or order volume from us. In particular, any supply reductions from
our polysilicon, ingot or wafer suppliers could materially reduce manufacturing
volume.
Our
agreements with Cypress require us to indemnify Cypress for certain tax
liabilities. These indemnification obligations and related contractual
restrictions may limit our ability to obtain additional financing, participate
in future acquisitions or pursue other business initiatives.
We have
entered into a tax sharing agreement with Cypress, under which we and Cypress
agree to indemnify one another for certain taxes and similar obligations that
the other party could incur under certain circumstances. In general, we will be
responsible for taxes relating to our business. As of September 29, 2008,
Cypress distributed the shares of SunPower to its shareholders, so we are no
longer eligible to file any state combined returns. To the extent that we become
entitled to certain tax benefits on our separate
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tax
returns existing as of such date, we will distribute the amount of such benefits
to Cypress. We will distribute these amounts to Cypress in cash or in our
shares, at Cypress’s option. As of December 28, 2008, potential future
payments to Cypress, which would be made over a period of several years,
aggregate approximately $18.7 million. The majority of the deductions
giving rise to these potential tax benefit payments were created by employee
stock transactions. Because there is uncertainty as to our ability to use
these deductions, the portion created by employee stock transactions are not
reflected on our Consolidated Balance Sheets. If these deductions were reflected
on the Consolidated Balance Sheets, they could be accounted for as an increase
to deferred tax assets and stockholders’ equity.
Cypress
has obtained a ruling from the Internal Revenue Service, or IRS, that the
distribution by Cypress of our class B common stock to Cypress stockholders
qualified as a tax-free distribution under Section 355 of the Internal
Revenue Code, or Code. Despite that ruling, the distribution may nonetheless be
taxable to Cypress if 50% or more of our voting power or economic value is
acquired as part of a plan or series of related transactions that includes the
distribution of our stock. The tax sharing agreement requires us to indemnify
Cypress for any liability incurred as a result of issuances or dispositions of
our stock after the distribution, other than liability attributable solely to
certain dispositions of our stock by Cypress, that cause Cypress’s distribution
of our stock to be taxable to Cypress. Under current law, for up to two years
after the distribution (or possibly longer if we are acting pursuant to a
preexisting plan), our obligation to indemnify Cypress will be triggered if we
issue stock or otherwise participate in one or more financing or acquisition
transactions in which 50% or more of our voting power or economic value is
acquired as part of a plan or series of related transactions that includes the
distribution.
In
connection with Cypress’ spin-off of its shares of our class B common stock, on
August 12, 2008, we and Cypress entered into an Amendment No. 1
to the Tax Sharing Agreement, or the Amended Tax Sharing Agreement, to address
certain transactions that may affect the tax treatment of the spin-off and
certain other matters.
Under the
Amended Tax Sharing Agreement, we are required to provide notice to Cypress
of certain transactions that could give rise to our indemnification obligation
described above. Such transactions include a conversion of any or all of our
class B common stock to class A common stock or any similar
recapitalization transaction or series of related transactions (a
“Recapitalization”). We are not required to indemnify Cypress for any taxes
which would result solely from (A) issuances and dispositions of our stock
prior to the spin-off and (B) any acquisition of our stock by Cypress after
the spin-off.
Under the
Amended Tax Sharing Agreement, we also agreed that, for a period of
25 months following the spin-off, we will not (i) effect a
Recapitalization or (ii) enter into or facilitate any other transaction
resulting in an acquisition of our stock without first obtaining the written
consent of Cypress; if such transaction (either alone or when taken together
with one or more other transactions entered into or facilitated by us
consummated after August 4, 2008 and during the 25-month period following
the spin-off) would involve the acquisition of more than 25% of our outstanding
shares of common stock. However, we need not obtain Cypress’s consent for
(A) certain qualifying acquisitions of our stock issued in connection
with the performance of services, (B) any acquisition of our stock for
which we furnish to Cypress prior to such acquisition an opinion of counsel and
supporting documentation, in form and substance reasonably satisfactory to
Cypress (a “Tax Opinion”), that such acquisition will qualify for certain “safe
harbors” specified in Treasury Regulations or (C) the adoption by us of a
standard stockholder rights plan. We further agreed that we will not
(i) effect a Recapitalization during the 36 month period following the
spin-off without first obtaining a Tax Opinion to the effect that such
Recapitalization (either alone or when taken together with any other transaction
or transactions) will not cause the spin-off to become taxable, or
(ii) seek any private ruling, including any supplemental private ruling,
from the IRS with regard to the spin-off, or any transaction having any bearing
on the tax treatment of the spin-off, without the prior written consent of
Cypress.
Our
ability to use our equity to obtain additional financing or to engage in
acquisition transactions for a period of time after the tax-free distribution of
our shares by Cypress will be restricted if we can only sell or issue a limited
amount of our stock before triggering our obligation to indemnify Cypress for
taxes relating to the distribution of our stock. Cypress made a complete
distribution of its shares of our class B common stock on September 29,
2008 when our total outstanding capital stock was 85.8 million
shares. Thus, in order to avoid causing an indemnification obligation to
Cypress, we could not, for up two years (or possibly longer) after the date
of the distribution, issue 85.8 million or more shares of our class A
common stock or participate in one or more transactions (excluding the
distribution itself) in which 42 million or more shares of our
then-existing class A common stock were acquired, if any such
transaction(s) are in connection with a plan or series of related transactions
that includes the distribution. If we were to participate in such a transaction,
and thereby triggered tax to Cypress on the distribution, then assuming that
Cypress distributed 42 million shares, Cypress’s top marginal income tax rate
was 40% for federal and state income tax purposes, the fair market value of our
class B common stock was $35.00 per share, and Cypress’s tax basis in such
stock was $5.00 per share on the date of the distribution, our liability under
our indemnification obligation to Cypress would be approximately
$504.0 million.
Our
headquarters and manufacturing facilities, as well as the facilities of certain
of our key subcontractors, are located in regions that are subject to
earthquakes and other natural disasters.
Our
headquarters and research and development operations are located in California,
our manufacturing facilities are located in the Philippines, and the facilities
of our subcontractor for assembly and test of solar panels are located in China.
Since we do not have redundant facilities, any significant earthquake, tsunami
or other natural disaster in these countries could materially disrupt our
production capabilities and could result in our experiencing a significant delay
in delivery, or substantial shortage, of our solar cells.
We
could unexpectedly be adversely affected by violations of the U.S. Foreign
Corrupt Practices Act and similar worldwide anti-bribery laws.
The U.S.
Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery laws in other
jurisdictions generally prohibit companies and their intermediaries from making
improper payments to non-U.S. officials for the purpose of obtaining or
retaining business. Our policies mandate compliance with these anti-bribery
laws. We operate in many parts of the world that have experienced governmental
corruption to some degree and, in certain circumstances, strict compliance with
anti-bribery laws may conflict with local customs and practices. We train our
key staff concerning FCPA issues, and we also inform many of our partners,
subcontractors, agents and others who work for us or on our behalf that they
must comply with FCPA requirements. There can be no assurance that our internal
controls and procedures will always protect us from the reckless or criminal
acts committed by our employees, subcontractors or agents. If we are found to be
liable for FCPA violations (either due to our own acts or our inadvertence, or
due to the acts or inadvertence of others), we could suffer from criminal or
civil penalties or other sanctions which could have a material adverse effect on
our business.
Compliance
with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.
We are
required to comply with all foreign, U.S. federal, state and local laws and
regulations regarding pollution control and protection of the environment. In
addition, under some statutes and regulations, a government agency, or other
parties, may seek recovery and response costs from operators of property where
releases of hazardous substances have occurred or are ongoing, even if the
operator was not responsible for such release or otherwise at fault. We use,
generate and discharge toxic, volatile and otherwise hazardous chemicals and
wastes in our research and development and manufacturing activities. Any failure
by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to potentially significant monetary
damages and fines or suspensions in our business operations. In addition, if
more stringent laws and regulations are adopted in the future, the costs of
compliance with these new laws and regulations could be substantial. To date
such laws and regulations have not had a significant impact on our operations,
and we believe that we have all necessary permits to conduct their respective
operations as they are presently conducted. If we fail to comply with present or
future environmental laws and regulations, however, we may be required to pay
substantial fines, suspend production or cease operations.
Our
success depends on the continuing contributions of our key
personnel.
We rely
heavily on the services of our key executive officers and the loss of services
of any principal member of our management team could adversely impact our
operations. In addition, we anticipate that we will need to hire a significant
number of highly skilled technical, manufacturing, sales, marketing,
administrative and accounting personnel. The competition for qualified personnel
is intense in our industry. We may not be successful in attracting and retaining
sufficient numbers of qualified personnel to support our anticipated growth.
However, we cannot guarantee that any employee will remain employed with us for
any definite period of time since all of our employees, including our key
executive officers, serve at-will and may terminate their employment at any time
for any reason.
Risks
Related to Our Intellectual Property
Loss
of government programs that partially fund our research and development programs
would increase our research and development expenses.
We
selectively pursue contract research, product development and market development
programs funded by various agencies of the federal and state governments to
complement and enhance our own resources. Funding from government grants is
generally recorded as an offset to our research and development expense. These
government agencies may not continue their commitment to programs relevant to
our development projects. Moreover, we may not be able to compete successfully
to obtain funding through these or other programs, and generally government
agencies may unilaterally terminate or modify such agreements. A reduction or
discontinuance of these programs, or of our participation in these programs,
would increase our research and development expenses, which could materially and
adversely affect our results of operations and could impair our ability to
develop competitive solar power products and services.
Our
reliance on government programs to partially fund our research and development
programs could impair our ability to commercialize our solar power products and
services.
Government
funding of some of our research and development efforts imposes certain
restrictions on our ability to commercialize results and may grant
commercialization rights to the government. In some funding awards, the
government is entitled to intellectual property rights arising from the related
research. Such rights could include a nonexclusive, nontransferable,
irrevocable, paid-up license to practice or have practiced each subject
invention developed under an award throughout the world by or on behalf of the
government, or the right to require us to grant a license to the developed
technology or products to a third-party or, if we refuse, the government may
grant the license itself, if the government determines that action is necessary
because we fail to achieve practical application of the technology, or because
action is necessary to alleviate health or safety needs, to meet requirements of
federal regulations, or to give the United States industry preference. Accepting
government funding can also require that manufacturing of products developed
with federal funding be conducted in the United States.
We
are dependent on our intellectual property, and we may face intellectual
property infringement claims that could be time-consuming and costly to defend
and could result in the loss of significant rights.
From time
to time, we, our respective customers or third-parties with whom we work may
receive letters, including letters from various industry participants, alleging
infringement of their patents. Although we are not currently aware of any
parties pursuing or intending to pursue infringement claims against us, we
cannot assure investors that we will not be subject to such claims in the
future. Additionally, we are required by contract to indemnify some of our
customers and our third-party intellectual property providers for certain costs
and damages of patent infringement in circumstances where our products are a
factor creating the customer’s or these third-party providers’ infringement
liability. This practice may subject us to significant indemnification claims by
our customers and our third-party providers. We cannot assure investors that
indemnification claims will not be made or that these claims will not harm our
business, operating results or financial condition. Intellectual property
litigation is very expensive and time-consuming and could divert management’s
attention from our business and could have a material adverse effect on our
business, operating results or financial condition. If there is a successful
claim of infringement against us, our customers or our third-party intellectual
property providers, we may be required to pay substantial damages to the party
claiming infringement, stop selling products or using technology that contains
the allegedly infringing intellectual property, or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Parties
making infringement claims may also be able to bring an action before the
International Trade Commission that could result in an order stopping the
importation into the United States of our solar cells. Any of these judgments
could materially damage our business. We may have to develop non-infringing
technology, and our failure in doing so or in obtaining licenses to the
proprietary rights on a timely basis could have a material adverse effect on our
business.
We
have filed, and, may continue to file claims against other parties for
infringing our intellectual property that may be very costly and may not be
resolved in our favor.
To
protect our intellectual property rights and to maintain our competitive
advantage, we have, and may continue to, file suits against parties who we
believe infringe our intellectual property. Intellectual property litigation is
expensive and time consuming and could divert management’s attention from our
business and could have a material adverse effect on our business, operating
results or financial condition, and our enforcement efforts may not be
successful. In addition, the validity of our patents may be challenged in such
litigation. Our participation in intellectual property enforcement actions may
negatively impact our financial results.
We
may not be able to prevent others from using the term SunPower or similar terms
in connection with their solar power products which could adversely affect the
market recognition of our name and our revenue.
“SunPower”
is our registered trademark in certain countries, including the U.S., for use
with solar cells and solar panels. We are seeking similar registration of the
“SunPower” trademark in other countries but we may not be successful in some of
these jurisdictions. We hold registered trademarks for SunPower®, PowerLight®,
PowerGuard®, PowerTracker® and SunTile®, in certain countries, including the
U.S. We have not registered, and may not be able to register, these trademarks
in other key countries. In the foreign jurisdictions where we are unable to
obtain or have not tried to obtain registrations, others may be able to sell
their products using trademarks compromising or incorporating “SunPower,” or our
other chosen brands, which could lead to customer confusion. In addition, if
there are jurisdictions where another proprietor has already established
trademark rights in marks containing “SunPower,” or our other chosen brands, we
may face trademark disputes and may have to market our products with other
trademarks, which may undermine our marketing efforts. We may encounter
trademark disputes with companies using marks which are confusingly similar to
the SunPower mark, or our other marks, which if not resolved favorably could
cause our branding efforts to suffer. In addition, we may have difficulty in
establishing strong brand recognition with consumers if others use similar marks
for similar products.
We
rely substantially upon trade secret laws and contractual restrictions to
protect our proprietary rights, and, if these rights are not sufficiently
protected, our ability to compete and generate revenue could
suffer.
We seek
to protect our proprietary manufacturing processes, documentation and other
written materials primarily under trade secret and copyright laws. We also
typically require employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent
misappropriation of our technology. In addition, our proprietary rights may not
be adequately protected because:
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people
may not be deterred from misappropriating our technologies despite the
existence of laws or contracts prohibiting
it;
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policing
unauthorized use of our intellectual property may be difficult, expensive
and time-consuming, and we may be unable to determine the extent of any
unauthorized use;
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the
laws of other countries in which we market our solar cells, such as some
countries in the Asia/Pacific region, may offer little or no protection
for our proprietary technologies;
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reports
we file in connection with government-sponsored research contracts are
generally available to the public and third-parties may obtain some
aspects of our sensitive confidential
information.
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Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technologies could enable third-parties to benefit from our technologies without
compensating us for doing so. Any inability to adequately protect our
proprietary rights could harm our ability to compete, to generate revenue and to
grow our business.
We
may not obtain sufficient patent protection on the technology embodied in the
solar cells or solar system components we currently manufacture and market,
which could harm our competitive position and increase our
expenses.
Although
we substantially rely on trade secret laws and contractual restrictions to
protect the technology in the solar cells and solar system components we
currently manufacture and market, our success and ability to compete in the
future may also depend to a significant degree upon obtaining patent protection
for our proprietary technology. We currently own multiple patents and patent
applications which cover aspects of the technology in the solar cells and
mounting systems that we currently manufacture and market. Material patents that
relate to our systems products and services primarily relate to our rooftop
mounting products and ground-mounted tracking products. We intend to continue to
seek patent protection for those aspects of our technology, designs, and
methodologies and processes that we believe provide significant competitive
advantages.
Our
patent applications may not result in issued patents, and even if they result in
issued patents, the patents may not have claims of the scope we seek or we may
have to refile patent applications due to newly discovered prior art. In
addition, any issued patents may be challenged, invalidated or declared
unenforceable, or even if we obtain an award of damages for infringement by a
third-party, such award could prove insufficient to compensate for all damages
incurred as a result of such infringement. The term of any issued patents would
be 20 years from their filing date and if our applications are pending for a
long time period, we may have a correspondingly shorter term for any patent that
may issue. Our present and future patents may provide only limited protection
for our technology and may not be sufficient to provide competitive advantages
to us. For example, competitors could develop similar or more advantageous
technologies on their own or design around our patents. Also, patent protection
in certain foreign countries may not be available or may be limited in scope and
any patents obtained may not be as readily enforceable as in the United States,
making it difficult for us to effectively protect our intellectual property from
misuse or infringement by other companies in these countries. Our inability to
obtain and enforce our intellectual property rights in some countries may harm
our business. In addition, given the costs of obtaining patent protection, we
may choose not to protect certain innovations that later turn out to be
important.
Risks
Related to Our Debt and Equity Securities
Conversion
of our outstanding debentures, future substantial issuances or dispositions of
our class A or class B common stock or other securities, could dilute
ownership and earnings per share or cause the market price of our stock to
decrease.
To the
extent we issue class A common stock upon conversion of debentures, the
conversion of some or all of such debentures will dilute the ownership interests
of existing stockholders, including holders who had previously converted their
debentures. Any sales in the public market of the class A and class B
common stock issuable upon such conversion could adversely affect prevailing
market prices of our class A and class B common stock. Sales of our
class A or class B common stock in the public market or sales of any of our
other securities could dilute ownership and earnings per share, and even the
perception that such sales could occur and could cause the market prices of our
class A and class B common stock to decline. In addition, the existence of
our outstanding debentures may encourage short selling of our common stock by
market participants who expect that the conversion of the debentures could
depress the prices of our class A and class B common stock.
Approximately
4.7 million shares of class A common stock were lent to underwriters of our
debenture offerings, including approximately 2.9 million shares lent to Lehman
Brothers International (Europe) Limited, or LBIE, and approximately 1.8 million
shares lent to Credit Suisse International, or CSI. Such shares were lent
to facilitate later hedging arrangements of future purchases for debentures in
the after-market. Shares still held by CSI may be freely sold into the market at
any time, and such sales could depress our stock price. In addition, any hedging
activity facilitated by our debenture underwriters would involve short sales or
privately negotiated derivatives transactions. Due to the September 15, 2008
bankruptcy filing of Lehman and commencement of administrative proceedings for
LBIE in the U.K., we recorded the shares lent to LBIE as issued and outstanding
as of September 15, 2008, for the purpose of computing and reporting basic and
diluted earnings per share. If Credit Suisse Securities (USA) LLC or its
affiliates, including CSI, were to file bankruptcy or commence similar
administrative, liquidating, restructuring or other proceedings, we may have to
consider approximately 1.8 million shares lent to CSI as issued and outstanding
for purposes of calculating earnings per share which would further dilute our
earnings per share. These or other similar transactions could further negatively
affect our stock price.
The
price of our class A common stock, and therefore of our outstanding
debentures, as well as our class B common stock may fluctuate significantly, and
a liquid trading market for our class A and class B common stock may not be
sustained.
Our
class A and class B common stock has a limited trading history in the
public markets, and during that period has experienced extreme price and volume
fluctuations. The trading price of our class A and class B common stock
could be subject to wide fluctuations due to the factors discussed in this risk
factors section. In addition, the stock market in general, and The Nasdaq Global
Select Market and the securities of technology companies and solar companies in
particular, have experienced severe price and volume fluctuations. These trading
prices and valuations, including our own market valuation and those of companies
in our industry generally, may not be sustainable. These broad market and
industry factors may decrease the market price of our class A and class B
common stock, regardless of our actual operating performance. Because the
debentures are convertible into our class A common stock, volatility or
depressed prices of our class A common stock could have a similar effect on
the trading price of these debentures.
The
difference in the voting rights and liquidity could result in different market
values for shares of our class A and our class B common
stock.
The
rights of class A and class B common stock are substantially similar,
except with respect to voting. The class B common stock is entitled to
eight votes per share and the class A common stock is entitled to one vote
per share. Additionally, our restated certificate of incorporation imposed
certain limitations on the rights of holders of class B common stock to vote the
full number of their shares. The difference in the voting rights of our
class A and class B common stock could reduce the value of our
class A common stock to the extent that any investor or potential future
purchaser of our common stock ascribes value to the right of our class B
common stock to eight votes per share. In addition, the lack of a long trading
history and lower trading volume of the class B common stock, compared to the
class A common stock, could result in lower trading prices for the class B
common stock.
Delaware
law and our certificate of incorporation and bylaws contain anti-takeover
provisions, our outstanding debentures provide for a right to convert upon
certain events, and our board of directors entered into a rights agreement and
declared a rights dividend, any of which could delay or discourage takeover
attempts that stockholders may consider favorable.
Provisions
in our restated certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in our management. These
provisions include the following:
• the
right of the board of directors to elect a director to fill a vacancy created by
the expansion of the board of directors;
• the
prohibition of cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
• the
requirement for advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon at a stockholders’
meeting;
• the
ability of the board of directors to issue, without stockholder approval, up to
approximately 10.0 million shares of preferred stock with terms set by the board
of directors, which rights could be senior to those of common stock;
and
• our
board of directors is divided into three classes of directors, with the classes
to be as nearly equal in number as possible;
• no
action can be taken by stockholders except at an annual or special meeting of
the stockholders called in accordance with our bylaws, and stockholders may not
act by written consent;
• stockholders
may not call special meetings of the stockholders;
• limitations
on the voting rights of our stockholders with more than 15% of our class B
common stock subject to receipt by Cypress of a supplemental ruling from
the IRS that the effectiveness of the restriction will not prevent the favorable
rulings received by Cypress with respect to certain tax issues arising under
Section 355 of the Code in connection with the spin-off from having full
force and effect; and
• our
board of directors is able to alter our bylaws without obtaining stockholder
approval.
Certain
provisions of our outstanding debentures could make it more difficult or more
expensive for a third-party to acquire us. Upon the occurrence of certain
transactions constituting a fundamental change, holders of our outstanding
debentures will have the right, at their option, to require us to repurchase, at
a cash repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest on the debentures, all of their debentures or any portion of the
principal amount of such debentures in integral multiples of $1,000. We may also
be required to issue additional shares of our class A common stock upon
conversion of such debentures in the event of certain fundamental
changes. In addition, on August 12, 2008, we entered into a Rights
Agreement with Computershare Trust Company, N.A. and our board of directors
declared an accompanying rights dividend. The Rights Agreement became effective
upon completion of Cypress’ spin-off of our shares of class B common stock to
the holders of Cypress common stock. The Rights Agreement contains specific
features designed to address the potential for an acquirer or significant
investor to take advantage of our capital structure and unfairly discriminate
between classes of our common stock. Specifically, the Rights Agreement is
designed to address the inequities that could result if an investor, by
acquiring 20% or more of the outstanding shares of class B common stock,
were able to gain significant voting influence over our company without making a
correspondingly significant economic investment. Our board of directors
determined that the rights dividend became payable to the holders of record of
our common stock as of the close of business on September 29, 2008. The rights
dividend and Rights Agreement, commonly referred to as a “poison pill,” could
delay or discourage takeover attempts that stockholders may consider
favorable.
ITEM 1B:
UNRESOLVED STAFF
COMMENTS
None.
ITEM 2:
PROPERTIES
Our
corporate headquarters is located in San Jose, California, where we occupy
approximately 60,000 square feet under a lease from Cypress that expires in
April 2011. In Richmond, California, we occupy approximately 207,000 square feet
for office, light industrial and research and development use under a lease from
an unaffiliated third-party that expires in December 2018. In addition to these
facilities, we also have our European headquarters located in Geneva,
Switzerland where we occupy approximately 4,000 square feet under a lease that
expires in September 2012 as well as sales and support offices in Southern
California, New Jersey, Australia, Canada, Germany, Italy, Spain, and South
Korea, all of which are leased from unaffiliated third-parties.
We leased
from Cypress an approximately 215,000 square foot building in the Philippines
from fiscal 2003 through April 2008, which serves as FAB1 with four solar cell
manufacturing lines in operation. In May 2008, we purchased FAB1 from Cypress
and assumed the lease for the land from an unaffiliated third-party for a total
purchase price of $9.5 million. The lease for the land expires in May 2048 and
is renewable for an additional 25 years. In August 2006, we purchased a 344,000
square foot building (FAB2) in the Philippines. FAB2 is approximately 20 miles
from FAB1 and is being developed to house up to twelve solar cell manufacturing
lines. We currently operate twelve solar cell manufacturing lines in our two
solar cell manufacturing facilities, with a total rated manufacturing
capacity of 414 megawatts per year. By the end of 2009, we plan to operate 16
solar cell manufacturing lines with an aggregate manufacturing capacity of 574
megawatts per year. We plan to begin production in 2010 on the first line of
FAB3 which will be constructed in Malaysia. FAB3 will be constructed in two
phases, with an aggregate manufacturing capacity of more than 500 megawatts per
year after the completion of the first phase, and an expected aggregate
manufacturing capacity of more than 1 gigawatt per year when the second phase is
completed. In January 2008, we completed the construction of an approximately
175,000 square foot building in the Philippines. This facility serves as our
solar panel assembly facility that currently operates seven solar panel
manufacturing lines with a rated manufacturing capacity of 210 megawatts of
solar panels per year. We may require additional space in the future, which may
not be available on commercially reasonable terms or in the location we
desire.
Because
of the interrelation of our business segments, both the Components Segment and
Systems Segment use substantially all of the properties at least in part, and we
retain the flexibility to use each of the properties in whole or in part for
each of the segments. Therefore, we do not identify or allocate assets by
business segment. For more information on property, plant and equipment by
country, see Note 17 of Notes to our Consolidated Financial Statements in "Item 8: Financial Statements and
Supplemental Data."
ITEM 3:
LEGAL
PROCEEDINGS
From time
to time we are a party to litigation matters and claims that are normal in the
course of our operations. While we believe that the ultimate outcome of these
matters will not have a material adverse effect on us, the outcome of these
matters is not determinable and negative outcomes may adversely affect our
financial position, liquidity or results of operations.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of fiscal 2008.
Our class
A and class B common stock is listed on the Nasdaq Global Select Market under
the trading symbol “SPWRA” and “SPWRB,” respectively. The high and low trading
prices of our class A and class B common stock during fiscal 2008 and 2007 are
as follows:
|
SPWRA
|
SPWRB*
|
|||||||||||||||
|
For
the year ended December 28, 2008
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
Fourth
quarter
|
$
|
77.25
|
$
|
19.00
|
$
|
71.47
|
$
|
11.94
|
||||||||
|
Third quarter
|
97.55
|
61.23
|
—
|
—
|
||||||||||||
|
Second quarter
|
99.58
|
72.71
|
—
|
—
|
||||||||||||
|
First quarter
|
131.29
|
54.95
|
—
|
—
|
||||||||||||
|
For
the year ended December 30, 2007
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
Fourth
quarter
|
$
|
164.49
|
$
|
81.50
|
$
|
—
|
$
|
—
|
||||||||
|
Third quarter
|
86.93
|
59.64
|
—
|
—
|
||||||||||||
|
Second quarter
|
65.55
|
45.84
|
—
|
—
|
||||||||||||
|
First
quarter
|
48.11
|
35.40
|
—
|
—
|
||||||||||||
|
*
|
Our
class B common stock started trading publicly on September 30,
2008.
|
As of
February 13, 2009, there were approximately 608 and 1,054 record
holders of our class A and class B common stock, respectively. A substantially
greater number of holders of our class A and class B common stock are in “street
name” or beneficial holders, whose shares are held of record by banks, brokers
and other financial institutions.
Dividends
We have
never declared or paid any cash dividend on our common stock, and we do not
currently intend to pay any cash dividend on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to finance the operation
and expansion of our business.
Our
credit facilities place restrictions on us and our subsidiaries’ ability to pay
cash dividends. Additionally, our debentures issued in February 2007 and July
2007 allow the holders to convert their bonds into our class A common stock if
we declare a dividend that on a per share basis exceeds 10% of our class A
common stock’s market price.
Recent
Sales of Unregistered Securities
We
conducted no unregistered sales of equity securities during the fourth quarter
of fiscal 2008.
Issuer
Purchases of Equity Securities
|
Period
|
Total Number
of
Shares
Purchased(1)
(in
thousands)
|
Average
Price
Paid
Per Share
|
Total
Number of Shares Purchased as
Part of Publicly Announced Plans
or Programs
|
Maximum
Number of Shares That May Yet
Be Purchased Under the Publicly Announced
Plans or Programs
|
|||
|
October
27, 2008 through November 23, 2008
|
15
|
$34.95
|
—
|
—
|
|||
|
November
24, 2008 through December 28, 2008
|
9
|
$32.82
|
—
|
—
|
|||
|
Total
|
24
|
$34.16
|
—
|
—
|
|||
|
(1)
|
The
total number of shares purchased includes shares surrendered to satisfy
tax withholding obligations in connection with the vesting of restricted
stock issued to employees.
|
Equity
Compensation Plan Information
The
following table provides certain information as of December 28, 2008 with
respect to our equity compensation plans under which shares of class A common
stock are authorized for issuance (in thousands, except dollar
figures):
|
Plan
Category
|
Number of securities to
be issued upon exercise
of outstanding
options,
warrants
and rights
|
Weighted average
exercise
price of
outstanding
options,
warrants
and
rights
|
Number of securities remaining
available
for future issuance
under
equity compensation
plans
(excluding securities
reflected
in the first column)
|
||||
|
Equity
compensation plans approved by security holders
|
2,008
|
$8.99
|
1,268
|
||||
|
Equity
compensation shares not approved by security holders
|
17
|
(1)
|
$2.00
|
—
|
|||
|
Total
|
2,025
|
(2)
|
$8.93
|
1,268
|
|||
|
(1)
|
Represents
one option to purchase shares of class A common stock issued to one
SunPower employee on June 17, 2004 with an exercise price of $2.00,
vesting over five years.
|
|
(2)
|
This
table excludes options to purchase an aggregate of approximately 520,000
shares of class A common stock, at a weighted average exercise price of
$9.03 per share, that we assumed in connection with the acquisition of
PowerLight (now known as SP Systems) in January
2007.
|
Company
Stock Price Performance
The
following graph compares the performance of an investment in our class A common
stock from the pricing of our IPO on November 17, 2005 through
December 28, 2008, with the NASDAQ Market Index and with four comparable
issuers: Evergreen Solar, Inc., Energy Conversion Devices, Inc., Suntech Power
Holdings Co., Ltd. and First Solar, Inc. The graph assumes $100 was invested on
November 17, 2005 in our class A common stock at the closing price of
$25.45 per share and at the closing prices for the NASDAQ Market Index,
Evergreen Solar, Inc. and Energy Conversion Devices, Inc. The graph also assumes
$100 was invested at the closing prices of the common stock for Suntech Power
Holdings Co., Ltd. on December 14, 2005 and First Solar, Inc. on November 17,
2006. In addition, the graph also assumes that any dividends were reinvested on
the date of payment without payment of any commissions. The performance shown in
the graph represents past performance and should not be considered an indication
of future performance.
ASSUMES
$100 INVESTED ON NOVEMBER 17, 2005
ASSUMES
DIVIDEND REINVESTED
FISCAL
YEAR ENDED DECEMBER 28, 2008
|
11/17/05
|
12/30/05
|
12/31/06
|
12/30/07
|
12/28/08
|
||||||||||||||||
|
SunPower
Corporation
|
$
|
100.00
|
$
|
133.56
|
$
|
146.05
|
$
|
514.93
|
$
|
139.02
|
||||||||||
|
NASDAQ
Market Index
|
100.00
|
99.32
|
108.77
|
120.45
|
68.92
|
|||||||||||||||
|
Evergreen
Solar, Inc.
|
100.00
|
89.27
|
63.45
|
144.34
|
23.55
|
|||||||||||||||
|
Energy
Conversion Devices, Inc.
|
100.00
|
130.15
|
108.53
|
105.78
|
74.77
|
|||||||||||||||
|
Suntech
Power Holdings Co., Ltd.(1)
|
181.67
|
226.73
|
545.27
|
68.60
|
||||||||||||||||
|
First
Solar, Inc.(2)
|
149.20
|
1,330.20
|
675.05
|
|||||||||||||||||
|
(1)
|
The
common stock of Suntech Power Holdings Co., Ltd. started trading publicly
on December 14, 2005.
|
|
(2)
|
The
common stock of First Solar, Inc. started trading publicly on November 17,
2006.
|
The
following selected consolidated financial data should be read together with
“Item
7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Item 8: Financial Statements and
Supplementary Data” included elsewhere in this Annual Report on Form
10-K.
On
November 9, 2004, Cypress acquired 100% ownership of all outstanding shares
of our capital stock, excluding unexercised warrants and options. This
transaction resulted in the “push down” of the effect of the acquisition of
SunPower by Cypress and created a new basis of accounting. The Consolidated
Balance Sheets and Statements of Operations data in this Annual Report on Form
10-K prior and up to November 8, 2004 refer to the Predecessor Company and
this period is referred to as the pre-merger period, while the Consolidated
Balance Sheets and Statements of Operations data subsequent to November 8,
2004 refer to the Successor Company and this period is referred to as the
post-merger period. A black line has been drawn between the accompanying
financial statements to distinguish between the pre-merger and post-merger
periods. After the close of trading on September 29, 2008, Cypress
completed a spin-off of all of its shares of our class B common stock, in the
form of a pro rata dividend to the holders of record as of September 17, 2008 of
Cypress common stock.
On
January 10, 2007, we completed the acquisition of PowerLight Corporation, a
leading global provider of large-scale solar power systems, which we renamed
SunPower Corporation, Systems (SP Systems) in June 2007. SP Systems designs,
manufactures, markets and sells solar electric power system technology that
integrates solar cells and solar panels manufactured by us and other suppliers
to convert sunlight to electricity compatible with the utility network. The
results of SP Systems have been included in the following selected consolidated
financial information from January 10, 2007. See Note 3 of Notes to
our Consolidated Financial Statements.
We report
our results of operations on the basis of 52- or 53-week periods, ending on the
Sunday closest to December 31. The combined periods of fiscal 2004 ended on
January 2, 2005 and included 53 weeks. Fiscal 2005 ended on January 1,
2006, fiscal 2006 ended on December 31, 2006, fiscal 2007 ended on December
30, 2007, fiscal 2008 ended on December 28, 2008 and each fiscal year included
52 weeks. Our fiscal quarters end on the Sunday closest to the end of the
applicable calendar quarter, except in a 53-week fiscal year in which the
additional week falls into the fourth quarter of that fiscal year.
|
Successor
Company
|
Predecessor
Company
|
||||||||||||||||||||||||
|
Year Ended
|
Nov.
9, 2004
Through
Jan.
2, 2005
|
Dec.
29, 2003
Through
Nov.
8, 2004
|
|||||||||||||||||||||||
|
(In
thousands, except per share data)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||||||||||||||
|
Consolidated
Statements of Operations Data
|
|||||||||||||||||||||||||
|
Revenue:
|
|||||||||||||||||||||||||
|
Systems
|
$
|
820,632
|
$
|
464,178
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||||||||
|
Components
|
614,287
|
310,612
|
236,510
|
78,736
|
4,055
|
6,830
|
|||||||||||||||||||
|
Total
revenue
|
1,434,919
|
774,790
|
236,510
|
78,736
|
4,055
|
6,830
|
|||||||||||||||||||
|
Cost
of revenue:
|
|||||||||||||||||||||||||
|
Cost of systems
revenue
|
653,569
|
386,511
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Cost of components
revenue
|
417,669
|
240,475
|
186,042
|
74,353
|
6,079
|
9,498
|
|||||||||||||||||||
|
Total cost of
revenue
|
1,071,238
|
626,986
|
186,042
|
74,353
|
6,079
|
9,498
|
|||||||||||||||||||
|
Gross
margin
|
363,681
|
147,804
|
50,468
|
4,383
|
(2,024
|
)
|
(2,668
|
)
|
|||||||||||||||||
|
Operating
income (loss)
|
168,467
|
2,342
|
19,107
|
(12,985
|
)
|
(4,552
|
)
|
(19,499
|
)
|
||||||||||||||||
|
Income
(loss) before income taxes and equity in earnings of unconsolidated
investees
|
147,584
|
3,560
|
28,461
|
(15,793
|
)
|
(5,609
|
)
|
(23,302
|
)
|
||||||||||||||||
|
Income
(loss) before equity in earnings of unconsolidated
investees
|
78,216
|
9,480
|
26,516
|
(15,843
|
)
|
(5,609
|
)
|
(23,302
|
)
|
||||||||||||||||
|
Net
income (loss)
|
$
|
92,293
|
$
|
9,202
|
$
|
26,516
|
$
|
(15,843
|
)
|
$
|
(5,609
|
)
|
$
|
(23,302
|
)
|
||||||||||
|
Net
income (loss) per share of class A and class B common
stock:
|
|||||||||||||||||||||||||
|
Basic(1)
|
$
|
1.15
|
$
|
0.12
|
$
|
0.40
|
$
|
(0.68
|
)
|
$
|
(2,804.50
|
)
|
$
|
(5.51
|
)
|
||||||||||
|
Diluted(1)
|
$
|
1.09
|
$
|
0.11
|
$
|
0.37
|
$
|
(0.68
|
)
|
$
|
(2,804.50
|
)
|
$
|
(5.51
|
)
|
||||||||||
|
Weighted-average
shares:
|
|||||||||||||||||||||||||
|
Basic
(1)
|
80,522
|
75,413
|
65,864
|
23,306
|
2
|
4,230
|
|||||||||||||||||||
|
Diluted(1)
|
84,446
|
81,227
|
71,087
|
23,306
|
2
|
4,230
|
|||||||||||||||||||
|
(1)
|
As
of September 15, 2008, the date on which Lehman filed a petition for
protection under Chapter 11 of the U.S. bankruptcy code and LBIE commenced
administrative proceedings (analogous to bankruptcy) in the United
Kingdom, approximately 2.9 million shares of class A common stock lent to
LBIE in connection with the 1.25% debentures are included in basic
weighted-average common shares. Basic weighted-average common shares
exclude approximately 1.8 million shares of class A common stock lent to
CSI in connection with the 0.75% debentures. See Note 15 of Notes to our
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used in computing basic and diluted net income
(loss) per share.
|
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
January
2,
2005
|
|||||||||||||||
|
Consolidated
Balance Sheets Data
|
||||||||||||||||||||
|
Cash,
cash equivalents and short-term investments (excluding restricted
cash)
|
$
|
219,510
|
$
|
390,667
|
$
|
182,092
|
$
|
143,592
|
$
|
3,776
|
||||||||||
|
Working
capital (deficiency)
|
396,849
|
93,953
|
228,269
|
155,243
|
(54,314
|
)
|
||||||||||||||
|
Total
assets
|
2,076,135
|
1,653,738
|
576,836
|
317,654
|
89,646
|
|||||||||||||||
|
Long-term
debt
|
54,598
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Convertible
debt
|
423,608
|
425,000
|
—
|
—
|
—
|
|||||||||||||||
|
Deferred
tax liability
|
8,115
|
6,213
|
46
|
336
|
—
|
|||||||||||||||
|
Customer
advances, net of current portion
|
91,359
|
60,153
|
27,687
|
28,438
|
—
|
|||||||||||||||
|
Other
long-term liabilities
|
25,950
|
14,975
|
—
|
—
|
—
|
|||||||||||||||
|
Notes
payable to Cypress, net of current portion
|
—
|
—
|
—
|
—
|
21,673
|
|||||||||||||||
|
Convertible
preferred stock
|
—
|
—
|
—
|
—
|
8,552
|
|||||||||||||||
|
Total
stockholders’ equity (deficit)
|
1,021,374
|
864,090
|
488,771
|
258,650
|
(10,664
|
)
|
||||||||||||||
General
We are a
vertically integrated solar products and services company that designs,
manufactures and markets high-performance solar electric power technologies. Our
solar cells and solar panels are manufactured using proprietary processes, and
our technologies are based on more than 15 years of research and
development. Of all the solar cells available for the mass market, we believe
our solar cells have the highest conversion efficiency, a measurement of the
amount of sunlight converted by the solar cell into electricity. Our solar power
products are sold through our components business segment, or Components
Segment. In January 2007, we acquired PowerLight Corporation, or
PowerLight, now known as SunPower Corporation, Systems, or SP Systems,
which developed, engineered, manufactured and delivered large-scale solar power
systems. These activities are now performed by our systems business segment, or
our Systems Segment. Our solar power systems, which generate electricity,
integrate solar cells and panels manufactured by us as well as other
suppliers.
In
November 2005, we raised net proceeds of $145.6 million in an initial public
offering, or IPO, of 8.8 million shares of class A common stock at a price
of $18.00 per share. In June 2006, we completed a follow-on public offering of
7.0 million shares of our class A common stock, at a per share price of
$29.50, and received net proceeds of $197.4 million. In July 2007, we completed
a follow-on public offering of 2.7 million shares of our class A common stock,
at a discounted per share price of $64.50, and received net proceeds of $167.4
million.
In February
2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures to Lehman Brothers Inc., or Lehman Brothers, and lent
approximately 2.9 million shares of our class A common stock to Lehman Brothers
International (Europe) Limited, or LBIE. Net proceeds from the issuance of our
1.25% senior convertible debentures in February 2007 were $194.0 million. We did
not receive any proceeds from the approximate 2.9 million loaned shares of our
class A common stock, but received a nominal lending fee. In July 2007, we
issued $225.0 million in principal amount of our 0.75% senior convertible
debentures to Credit Suisse Securities (USA) LLC, or Credit Suisse, and lent
approximately 1.8 million shares of our class A common stock to Credit Suisse
International, or CSI. Net proceeds from the issuance of our 0.75% senior
convertible debentures in July 2007 were $220.1 million. We did not receive any
proceeds from the approximate 1.8 million loaned shares of class A common stock,
but received a nominal lending fee. See Note 11 of Notes to our Consolidated
Financial Statements.
In
January 2007, we completed the acquisition of PowerLight, a privately-held
company which developed, engineered, manufactured and delivered large-scale
solar power systems for residential, commercial, government and utility
customers worldwide. These activities are now performed by our Systems Segment.
As a result of the acquisition, PowerLight became our wholly-owned subsidiary.
In June 2007, we changed PowerLight’s name to SunPower Corporation, Systems (SP
Systems) to capitalize on SunPower’s name recognition. We believe the
acquisition will enable us to develop the next generation of solar products and
solutions that will accelerate reduction in solar system cost to compete with
retail electric rates without incentives and simplify and improve customer
experience. The total purchase consideration and future stock compensation for
the transaction was $334.4 million, consisting of $120.7 million in cash and
$213.7 million in common stock, restricted stock, stock options and related
acquisition costs. See Note 3 of Notes to our Consolidated Financial
Statements.
After
completion of our IPO in November 2005, Cypress Semiconductor Corporation, or
Cypress, held, in the aggregate, approximately 52.0 million shares of our class
B common stock, representing all of our then-outstanding class B common stock.
On May 4, 2007 and August 18, 2008, Cypress completed the sale of 7.5
million shares and 2.5 million shares, respectively, of our class B common stock
in offerings pursuant to Rule 144 of the Securities Act. Such shares converted
to 10.0 million shares of class A common stock upon the sale. We were a
majority-owned subsidiary of Cypress through September 29, 2008. After the close
of trading on September 29, 2008, Cypress completed a spin-off of all of its
shares of our class B common stock, in the form of a pro rata dividend to the
holders of record as of September 17, 2008 of Cypress common stock. As a result,
our class B common stock now trades publicly and is listed on the Nasdaq Global
Select Market, along with our class A common stock.
Financial
Operations Overview
The
following describes certain line items in our Consolidated Statements of
Operations:
Total
Revenue
Systems
Segment Revenue: Our systems revenue represents sales of engineering,
procurement and construction, or EPC, projects and other services relating to
solar electric power systems that integrate our solar panels and balance of
systems components, as well as materials sourced from other manufacturers. In
the United States, where customers often utilize rebate and tax credit programs
in connection with projects rated one megawatt or less of capacity, we typically
sell solar systems rated up to one megawatt of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. In
Europe and South Korea, our systems are often purchased by third-party investors
as central-station solar power plants, typically rated from one to twenty
megawatts, which generate electricity for sale under tariff to regional and
public utilities. We also sell our solar systems under materials-only sales
contracts in the United States, Europe and Asia. The balance of our systems
revenue are generally derived from sales to new home builders for residential
applications and maintenance revenue from servicing installed solar systems. We
expect the current credit market conditions to continue through at least
the first half of fiscal 2009, negatively affecting our ability to finance
systems projects. The U.S. utility and power plant market demand for renewable
energy is expected to grow over 50% annually over the next five
years.
Components
Segment Revenue: Our components revenue represents sales of our solar
cells, solar panels and inverters to solar systems installers and other
resellers. Factors affecting our components revenue include unit volumes of
solar cells and solar panels produced and shipped, average selling prices,
product mix, product demand and the percentage of our construction projects
sourced with SunPower solar panels sold through the Systems Segment which
reduces the inventory available to sell through our Components Segment. We have
experienced quarter-over-quarter unit volume increases in shipments of our solar
power products since we began commercial production in the fourth quarter of
2004. From fiscal 2005 through 2008, we have experienced increases in average
selling prices for our solar power products primarily due to the strength of
end-market demand and favorable currency exchange rates. Accordingly, our
Components Segment's average selling prices were slightly higher during fiscal
2008 compared to the same period in fiscal 2007 and 2006. Over the next
several years, we expect average selling prices for our solar power products to
decline as the market becomes more competitive, as certain products mature and
as manufacturers are able to lower their manufacturing costs and pass on some of
the savings to their customers.
Cost
of Revenue
Systems
Segment Cost of Revenue: Our cost of systems revenue consists
primarily of solar panels, mounting systems, inverters and subcontractor costs.
The cost of solar panels is the single largest cost element in our cost of
systems revenue. Our Systems Segment sourced approximately 60% of its
solar panel installations with SunPower solar panels in fiscal 2008 compared to
27% in fiscal 2007. Over time, we expect that our Systems Segment will increase
the percentage of its construction projects sourced with SunPower solar panels
to as much as 80% in fiscal 2009. Our Systems Segment generally experiences
higher gross margin on construction projects that utilize SunPower solar panels
compared to construction projects that utilize solar panels purchased from
third-parties.
In
connection with the acquisition of PowerLight (now known as SP Systems) in
January 2007, there were $79.5 million of identifiable purchased intangible
assets, of which $56.8 million was being amortized to cost of systems revenue on
a straight-line basis over periods ranging from one to five years. As a result
of our new branding strategy, during the quarter ended July 1, 2007, the
PowerLight tradename asset with a net book value of $14.1 million was written
off as an impairment of acquisition-related intangible assets. As such, the
remaining balance of $41.2 million of intangible assets, which are related to
purchased patents, technology and backlog are being amortized to cost of systems
revenue on a straight-line basis over periods ranging from one to four
years.
Our cost
of systems revenue will also fluctuate from period to period due to the mix of
projects completed and recognized as revenue, in particular between large
projects and large commercial installation projects. Our gross profit each
quarter is affected by a number of factors, including the types of projects in
process and their various stages of completion, the gross margins estimated for
those projects in progress and the actual system group department overhead
costs. Historically, revenue from materials-only sales contracts generate a
higher gross margin percentage for our Systems Segment than revenue generated
from turnkey contracts which generate higher revenue per watt from providing
both materials as well as EPC management services.
Almost
all of our Systems Segment construction contracts are fixed price contracts.
However, we have in several instances obtained change orders that reimburse us
for additional unexpected costs due to various reasons. The Systems Segment also
has long-term agreements for solar cell and solar panel purchases with several
major solar panel manufacturers, some with liquidated damages and/or take-or-pay
arrangements. An increase in project costs, including solar panel, inverter and
subcontractor costs, over the term of a construction contract could have a
negative impact on our Systems Segment’s overall gross profit. Our Systems
Segment gross profit may also be impacted by certain adjustments for inventory
reserves. We are seeking to improve gross profit over time as we implement cost
reduction efforts, improve manufacturing processes, and seek better and less
expensive materials globally, as we grow the business to attain economies of
scale on fixed costs. Any increase in gross profit based on these items,
however, could be partially or completely offset by increased raw material costs
or our inability to increase revenue in line with expectations, and other
competitive pressures on gross margin.
Components
Segment Cost of Revenue: Our cost of components revenue consists
primarily of silicon ingots and wafers used in the production of solar cells,
along with other materials such as chemicals and gases that are needed to
transform silicon wafers into solar cells. For our solar panels, our cost of
revenue includes the cost of solar cells and raw materials such as glass, frame,
backing and other materials, as well as the assembly costs we pay to our
third-party subcontractor in China. Our Components Segment gross profit each
quarter is affected by a number of factors, including average selling prices for
our products, our product mix, our actual manufacturing costs, the utilization
rate of our solar cell manufacturing facilities and changes in amortization of
intangible assets.
From time
to time, we enter into agreements whereby the selling price for certain of our
solar power products is fixed over a defined period. An increase in our
manufacturing costs over such a defined period could have a negative impact on
our overall gross profit. Our gross profit may also be impacted by fluctuations
in manufacturing yield rates and certain adjustments for inventory reserves. We
expect our gross profit to increase over time as we improve our manufacturing
processes and as we grow our business and leverage certain of our fixed costs.
An expected increase in gross profit based on manufacturing efficiencies,
however, could be partially or completely offset by increased raw material costs
or decreased revenue. Our inventory policy is described in more detail under
“Critical Accounting Policies and Estimates.”
Other
Cost of Revenue Factors: Other factors contributing to cost of
revenue include depreciation, provisions for estimated warranty, salaries,
personnel-related costs, freight, royalties, facilities expenses and
manufacturing supplies associated with contracting revenue and solar cell
fabrication as well as factory pre-operating costs associated with our
second solar cell manufacturing facility, or FAB2, and our solar panel assembly
facility. Such pre-operating costs included compensation and training costs for
factory workers as well as utilities and consumable materials associated with
preproduction activities. Additionally, within our own solar panel assembly
facility in the Philippines we incur personnel-related costs, depreciation,
utilities and other occupancy costs. To date, demand for our solar power
products has been robust and our production output has increased allowing us to
spread a significant amount of our fixed costs over relatively high production
volume, thereby reducing our per unit fixed cost. We currently operate twelve
solar cell manufacturing lines in our two solar cell manufacturing facilities,
with a total rated manufacturing capacity of 414 megawatts per year. In
addition, we currently operate seven solar panel manufacturing lines in our
solar panel assembly facility, with a total rated manufacturing capacity of 210
megawatts per year. By the end of 2009, we plan to operate 16 solar cell
manufacturing lines with an aggregate manufacturing capacity of 574 megawatts
per year. We plan to begin production in 2010 on the first line of our
planned third solar cell manufacturing facility, or FAB3, which will
be constructed in Malaysia. FAB3 will be constructed in two phases, with an
aggregate manufacturing capacity of more than 500 megawatts per year after the
completion of the first phase, and an expected aggregate manufacturing capacity
of more than 1 gigawatt per year when the second phase is completed. As we build
additional manufacturing lines or facilities, our fixed costs will increase, and
the overall utilization rate of our solar cell manufacturing and solar panel
assembly facilities could decline, which could negatively impact our gross
margin. This decline may continue until a line’s manufacturing output reaches
its rated practical capacity.
Operating
Expenses
Our
operating expenses include research and development expense, sales, general and
administrative expense, purchased in-process research and development expense
and impairment of acquisition-related intangible assets. Research and
development expense consists primarily of salaries and related personnel costs,
depreciation and the cost of solar cell and solar panel materials and services
used for the development of products, including experiment and testing. We
expect our research and development expense to continually increase in absolute
dollars as we continue to develop new processes to further improve the
conversion efficiency of our solar cells and reduce their manufacturing cost,
and as we develop new products to diversify our product offerings.
Research
and development expense is reported net of any funding received under
contracts with governmental agencies because such contracts are considered
collaborative arrangements. These awards are typically structured such that only
direct costs, research and development overhead, procurement overhead and
general and administrative expenses that satisfy government accounting
regulations are reimbursed. In addition, our government awards from state
agencies will usually require us to pay to the granting governmental agency
certain royalties based on sales of products developed with grant funding or
economic benefit derived from incremental improvements funded. Royalties paid to
governmental agencies will be charged to the cost of goods sold. Our funding
from government contracts offset our research and development expense by
approximately 25%, 21% and 8% in fiscal 2008, 2007 and 2006,
respectively.
Sales,
general and administrative expense for our business consists primarily of
salaries and related personnel costs, professional fees, insurance and other
selling and marketing expenses. We expect our sales, general and administrative
expense to increase in absolute dollars as we expand our sales and marketing
efforts, hire additional personnel and improve our information technology
infrastructure to support our growth. However, assuming our revenue increases as
we expect, over time we anticipate that our sales, general and administrative
expense will continue to decrease as a percentage of revenue.
Purchased
in-process research and development expense for fiscal 2007 of $9.6 million
resulted from the acquisition of PowerLight (now known as SP Systems), as
technological feasibility associated with the in-process research and
development projects had not been established and no alternative future use
existed. In addition, as a result of the change in our branding strategy during
the quarter ended July 1, 2007, the net book value of the PowerLight tradename
of $14.1 million was written off as an impairment of acquisition-related
intangible assets.
Other
Income (Expense), Net
Interest income
consists of interest earned on cash, cash equivalents, restricted cash and
investments. Interest expense primarily relates to interest due on convertible
debt and outstanding customer advance payments (see Note 8 of Notes to our
Consolidated Financial Statements). In February 2007, we issued $200.0 million
in principal amount of our 1.25% senior convertible debentures and in July 2007,
we issued $225.0 million in principal amount of our 0.75% senior convertible
debentures (see Note 11 of Notes to our Consolidated Financial Statements).
Other, net consists primarily of the write-off of unamortized debt issuance
costs as a result of the market price conversion trigger on our senior
convertible debentures being met in December 2007, amortization of debt issuance
costs, impairment of investments, gains or losses from derivatives and foreign
exchange.
Income
Taxes
For
financial reporting purposes, during periods when we were a subsidiary of
Cypress, income tax expense and deferred income tax balances has historically
been calculated as if we were a separate entity and had prepared our own
separate tax return. Effective with the closing of our follow-on public offering
of common stock in June 2006, we are no longer eligible to file federal and most
state consolidated tax returns with Cypress. As of September 29, 2008, Cypress
completed a spin-off of all of its shares of our class B common stock to its
shareholders, so we are no longer eligible to file any state combined tax
returns with Cypress. Accordingly, we have agreed to pay Cypress for any federal
income tax credit or net operating loss carryforwards utilized in our federal
tax returns in subsequent periods that originated while our results were
included in Cypress’s federal tax returns. Deferred tax assets and liabilities
are recognized for temporary differences between financial statement and income
tax bases of assets and liabilities. Valuation allowances are provided against
deferred tax assets when management cannot conclude that it is more likely than
not that some portion or all deferred tax assets will be realized. See Notes 1,
2 and 13 of Notes to our Consolidated Financial Statements.
We
currently benefit from income tax holiday incentives in the Philippines in
accordance with our subsidiary’s registration with the Philippine Economic Zone
Authority, which provide that we pay no income tax in the Philippines. Our
current income tax holidays expire within the next several years beginning in
2010, and we intend to apply for extensions and renewals upon expiration.
However, these tax holidays may or may not be extended. We believe that as our
Philippine tax holidays expire, (a) gross income attributable to activities
covered by our Philippine Economic Zone Authority registrations will be taxed at
a 5% preferential rate, and (b) our Philippine net income attributable to
all other activities will be taxed at the statutory Philippine corporate income
tax rate, currently 32%. Fiscal 2007 was the first year for which
profitable operations benefitted from the Philippine tax ruling.
Equity
in Earnings of Unconsolidated Investees
In the
third quarter of fiscal 2006, we entered into an agreement to form Woongjin
Energy Co., Ltd, or Woongjin Energy, a joint venture to manufacture
monocrystalline silicon ingots. This joint venture is located in South Korea and
began manufacturing in the third quarter of fiscal 2007. In October 2007, we
entered into an agreement to form First Philec Solar Corporation, or First
Philec Solar, a joint venture to provide wafer slicing services of silicon
ingots. This joint venture is located in the Philippines and became operational
in the second quarter of fiscal 2008. We account for these investments
using the equity method, in which the equity investments are classified as
“Other long-term assets” in the Consolidated Balance Sheets and our share of the
investees’ earnings is included in “Equity in earnings of unconsolidated
investees” in the Consolidated Statements of Operations. See Note 10 of Notes to
our Consolidated Financial Statements.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Our most
critical policies include: (a) revenue recognition, which impacts the
recording of revenue; (b) allowance for doubtful accounts and sales
returns, which impacts sales, general and administrative expense;
(c) warranty reserves, which impact cost of revenue and gross margin;
(d) valuation of inventories, which impacts cost of revenue and gross
margin; (e) accounting for equity in earnings of joint ventures, which
impacts net income; (f) valuation of long-lived assets, which impacts
write-offs of goodwill and other intangible assets; (g) valuation of
goodwill impairment, which impacts operating expense; (h) purchase accounting,
which impacts fair value of goodwill, other intangible assets and in-process
research and development expense; (i) fair value of financial instruments; and
(j) accounting for income taxes which impacts our tax provision (benefit).
We also have other key accounting policies that are less subjective and,
therefore, judgments in their application would not have a material impact on
our reported results of operations. The following is a discussion of our most
critical policies as of and for the year ended December 28, 2008, as well
as the estimates and judgments involved.
Revenue
Recognition
Our
systems revenue is primarily comprised of EPC projects which are governed by
customer contracts that require us to deliver functioning solar power systems
and are generally completed within three to nine months from commencement of
construction. In addition, our Systems Segment also derives revenue from sales
of certain solar power products and services that are smaller in scope than an
EPC contract. We recognize revenue from fixed price construction contracts under
American Institute of Certified Public Accountants, or AICPA, Statement of
Position, or SOP, 81-1 “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts,” or SOP 81-1, using the
percentage-of-completion method of accounting. Under this method, systems
revenue arising from fixed price construction contracts is recognized as work is
performed based on the percentage of incurred costs to estimated total
forecasted costs utilizing the most recent estimates of forecasted
costs.
In
addition to the EPC deliverable, a limited number of arrangements also include
multiple deliverables such as post-installation systems monitoring and
maintenance and system output performance guarantees. For contracts with
separately priced performance guarantees or maintenance, we recognize revenue
related to such separately priced elements on a straight-line basis over the
contract period in accordance with Financial Accounting Standards Board, or
FASB, Technical Bulletin, or FTB, 90-1, “Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts,” or FTB 90-1. For contracts
including performance guarantees or maintenance contracts not separately priced,
we follow the guidance in Emerging Issues Task Force Issue, or EITF, No. 00-21,
“Revenue Arrangements with Multiple Deliverables,” or EITF 00-21, to determine
whether the entire contract has more than one unit of
accounting.
We have
determined that post-installation systems monitoring and maintenance, and system
output performance guarantees qualify as separate units of accounting under EITF
00-21. Such post-installation elements are deferred at the time the contract is
executed and are recognized to income over the contractual term under Staff
Accounting Bulletin, or SAB, No. 104. The remaining EPC is recognized to income
on a percentage-of-completion basis under SOP 81-1.
In
addition, when arrangements include contingent revenue clauses such as
liquidated damages or customer termination or put rights for non-performance, we
defer the contingent revenue until such time as the contingencies
expire.
Incurred
costs include all direct material, labor, subcontract costs and those indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Job material costs are included in incurred costs when the job materials
have been installed. Revenue is deferred and recognized upon installation, in
accordance with the percentage-of-completion method of accounting. Job materials
are considered installed materials when they are permanently attached or fitted
to the solar power system as required by the job’s engineering
design.
Due to
inherent uncertainties in estimating cost, job costs estimates are reviewed
and/or updated by management working within the Systems Segment. The Systems
Segment determines the completed percentage of installed job materials at the
end of each month; generally this information is also reviewed with the
customer’s on-site representative. The completed percentage of installed job
materials is then used for each job to calculate the month-end job material
costs incurred. Direct labor, subcontractor and other costs are charged to
contract costs as incurred. Provisions for estimated losses on uncompleted
contracts, if any, are recognized in the period in which the loss first becomes
probable and reasonably estimable. Contracts may include profit incentives such
as milestone bonuses. These profit incentives are included in the contract value
when their realization is reasonably assured.
We sell
our components products, as well as our balance of systems products from the
Systems Segment, to system integrators and original equipment manufacturers, or
OEMs, and recognize revenue, net of accruals for estimated sales returns, when
persuasive evidence of an arrangement exists, the product has shipped, title and
risk of loss has passed to the customer, the sales price is fixed and
determinable, collectability of the resulting receivable is reasonably assured
and the rights and risks of ownership have passed to the customer. We do not
currently have any significant post-shipment obligations, including
installation, training or customer acceptance clauses with any of our customers,
which could have an impact on revenue recognition. As such, we record revenue
and trade receivables for the selling price when the above conditions are met.
Our revenue recognition is consistent across product lines and sales practices
are consistent across all geographic locations.
Allowance
for Doubtful Accounts and Sales Returns
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. A considerable amount
of judgment is required to assess the likelihood of the ultimate realization of
accounts receivables. We make our estimates of the collectability of our
accounts receivable by analyzing historical bad debts, specific customer
creditworthiness and current economic trends. The allowance for doubtful
accounts was $1.9 million and $1.4 million as of December 28, 2008 and
December 30, 2007, respectively.
In
addition, at the time revenue is recognized, we simultaneously record estimates
for sales returns which reduces revenue. These estimates are based on historical
sales returns, analysis of credit memo data and other known factors. Actual
returns could differ from these estimates. The allowance for sales returns was
$0.2 million and $0.4 million as of December 28, 2008 and December 30,
2007, respectively.
Warranty
Reserves
It is
customary in our business and industry to warrant or guarantee the performance
of our solar panels at certain levels of conversion efficiency for extended
periods, often as long as 20 years. It is also customary to warrant or guarantee
the functionality of our solar cells for at least 10 years. In addition, we
generally provide a warranty on our systems for a period of 5 to 10
years. We also pass through to customers long-term warranties from the OEMs of
certain system components. Warranties of 20 years from solar panels suppliers
are standard, while inverters typically carry a 2-, 5- or 10-year warranty.
We therefore maintain warranty reserves to cover potential liability that could
arise from these guarantees. Our potential liability is generally in the form of
product replacement or repair. Our warranty reserves reflect our best estimate
of such liabilities and are based on our
- 37
-
analysis
of product returns, results of industry-standard accelerated testing, unique
facts and circumstances involved in each particular construction contract and
various other assumptions that we believe to be reasonable under the
circumstances. We recognize our warranty reserve as a component of cost of
revenue. Our warranty reserve includes specific accruals for known product and
system issues and an accrual for an estimate of incurred but not reported
product and system issues based on historical activity. Due to effective product
testing and the short turnaround time between product shipment and the detection
and correction of product failures, accruals for warranties issued were $14.2
million, $10.8 million and $3.2 million during fiscal 2008, 2007 and 2006,
respectively, and the year-over-year increase is primarily attributable to
increased sales of our products. See Note 9 of Notes to our Consolidated
Financial Statements.
Valuation
of Inventory
Inventory
is valued at the lower of cost or market. Certain factors could impact the
realizable value of our inventory, so we continually evaluate the recoverability
based on assumptions about customer demand and market conditions. The evaluation
may take into consideration historic usage, expected demand, anticipated sales
price, new product development schedules, the effect new products might have on
the sale of existing products, product obsolescence, customer concentrations,
product merchantability and other factors. The reserve or write-down is equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory reserves or write-downs may be required that could
negatively impact our gross margin and operating results. If actual market
conditions are more favorable, we may have higher gross margin when products
that have been previously reserved or written down are eventually
sold.
Equity
in Earnings of Unconsolidated Investees
We
account for our investment in Woongjin Energy located in South Korea and First
Philec Solar located in the Philippines under APB Opinion No. 18 “The Equity
Method of Accounting for Investments in Common Stock,” or the equity method, in
which the equity investments are classified as “Other long-term assets” in the
Consolidated Balance Sheets and our share of the investees’ earnings is included
in “Equity in earnings of unconsolidated investees” in the Consolidated
Statements of Operations. As of December 28, 2008 and December 30, 2007, we had
a 40.0% and 19.9% equity investment, respectively, in Woongjin Energy. As
of December 28, 2008 and December 30, 2007, we had a 19.0% and 16.9% equity
investment, respectively, in First Philec Solar. To calculate our share of the
investees’ earnings, we adjust the net income (loss) of each joint venture to
conform to U.S. GAAP and multiply that by our equity investment.
We
periodically evaluate the qualitative and quantitative attributes of our
relationship with Woongjin Energy and First Philec Solar to determine whether we
are the primary beneficiary of the joint ventures and need to consolidate their
financial results into our financial statements in accordance with FASB Staff
Position, or FSP, Interpretation No. 46 “Consolidation of Variable Interest
Entities,” or FSP FIN 46(R). We do not consolidate the financial results of
Woongjin Energy and First Philec Solar as we have concluded that we are not the
primary beneficiary of any of the above joint ventures and we do not absorb a
majority of the joint ventures’ income (loss) or receive a majority of the
expected residual returns. See Note 10 of the Notes to our Consolidated
Financial Statements for discussions of our joint ventures.
Valuation
of Long-Lived Assets
Our
long-lived assets include manufacturing equipment and facilities as well as
certain intangible assets. Our business requires heavy investment in
manufacturing facilities that are technologically advanced but can quickly
become significantly under-utilized or rendered obsolete by rapid changes in
demand for solar power products produced in those facilities. In
November 2004, Cypress acquired 100% ownership of all outstanding shares of
our capital stock, and as a result of that transaction, we were required to
record Cypress’s cost of acquiring us in our financial statement by recording
intangible assets including purchased technology, patents, trademarks,
distribution agreement and goodwill. In January 2007, we acquired PowerLight,
and in January 2008 and July 2008, we acquired Solar Solutions (subsequently
renamed SunPower Italia S.r.l., or SunPower Italia) and Solar Sales Pty. Ltd.
(subsequently renamed SunPower Corporation Australia Pty. Ltd., or SunPower
Australia), respectively. In connection with the transactions, we recorded
all the acquired assets and liabilities at their fair values on the date of the
acquisition, including goodwill and identified intangible assets.
We
evaluate our long-lived assets, including property, plant and equipment and
purchased intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. Prior to fiscal 2007, we operated in one business segment and
therefore impairment of long-lived assets was assessed at the enterprise level.
As a result of the acquisition of PowerLight, we began operating in two business
segments, the Systems Segment and Components Segment, and impairment of
long-lived assets is assessed at the business segment level. Factors considered
important that could result in an impairment review include significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of use of acquired assets or the
strategy for our business and significant negative industry or economic trends.
Impairments are recognized based on the difference between the fair value of the
asset and its carrying value, and fair value is generally measured based on
discounted cash flow analyses.
In fiscal
2008, we recorded a $2.2 million impairment charge to cost of components revenue
for manufacturing equipment located in a Texas wafer fabrication facility. As a
result of Cypress’s announcement to close its Texas wafer fabrication facility
that manufactured our imaging and infrared detector products, we evaluated our
alternatives relating to the future plans for this business and decided to
wind-down our activities related to the imaging detector product line in the
first quarter of fiscal 2008. In fiscal 2007, we recorded $14.4 million of
impairment charges relating to long-lived assets, primarily related to a $14.1
million write-off of the carrying value of the PowerLight tradename resulting
from a change in our branding strategy.
Goodwill
Impairment Testing
On
November 9, 2004, Cypress acquired 100% ownership of all outstanding shares
of our capital stock, excluding unexercised warrants and options. As a result of
that transaction, we were required to record Cypress’ cost of acquiring us,
including its equity investment and pro rata share of our losses in our
financial statements by recording intangible assets including purchased
technology, patents, trademarks, distribution agreement and goodwill. In
January 2007, we acquired PowerLight, and in January 2008 and July 2008, we
acquired SunPower Italia and SunPower Australia, respectively, and as a result
of the transactions, we were required to record all assets and liabilities
acquired under the purchase acquisition, including goodwill and identified
intangible assets, at fair value in our financial statements. We perform a
goodwill impairment test on an annual basis and will perform an assessment
between annual tests in certain circumstances. The process of evaluating the
potential impairment of goodwill is highly subjective and requires significant
judgment at many points during the analysis. In estimating the fair value of our
business, we make estimates and judgments about our future cash flows. Our cash
flow forecasts are based on assumptions that are consistent with the plans and
estimates we use to manage our business. See Note 4 of Notes to our Consolidated
Financial Statements.
Purchase
Accounting
We record
all assets and liabilities acquired in purchase acquisitions, including
goodwill, identified intangible assets and in-process research and development,
at fair value as required by SFAS No. 141 “Business Combinations.” The
initial recording of goodwill, identified intangible assets and in-process
research and development requires certain estimates and assumptions especially
concerning the determination of the fair values and useful lives of the acquired
intangible assets. The judgments made in the context of the purchase price
allocation can materially impact our future results of operations. Accordingly,
for significant acquisitions, we obtain assistance from third-party valuation
specialists. The valuations are based on information available at the
acquisition date. Goodwill is not amortized but is subject to annual tests for
impairment or more often if events or circumstances indicate they may be
impaired. Other identified intangible assets are amortized over their estimated
useful lives and are subject to impairment if events or circumstances indicate a
possible inability to realize the carrying amount. See Note 3 and 4 of
Notes to our Consolidated Financial Statements.
Fair
Value of Financial Instruments
Effective
December 31, 2007, we adopted the provisions of SFAS No. 157 “Fair
Value Measurements,” or SFAS No. 157, which defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Our
financial assets and financial liabilities that require recognition under SFAS
No. 157 include available-for-sale securities under SFAS No. 115
“Accounting for Investment in Certain Debt and Equity Securities,” or SFAS No.
115, and foreign currency derivatives. We enter into over-the-counter, or OTC,
foreign currency derivatives and use a valuation model to derive the value of
option and forward contracts. In determining fair value, we use various
valuation techniques, including market and income approaches to value
available-for-sale securities and foreign currency derivatives. SFAS No. 157
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of us.
Unobservable inputs are inputs that reflect our assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. As such,
fair value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure. The hierarchy is broken down into three levels based on
the reliability of inputs as follows:
|
•
|
Level
1—Valuations based on quoted prices in active markets for identical assets
or liabilities that we have the ability to access. Since valuations are
based on quoted prices that are readily and regularly available in an
active market, valuation of these products does not entail a significant
degree of judgment. Financial assets utilizing Level 1 inputs include most
money market funds and bank notes.
|
|
•
|
Level
2—Valuations based on quoted prices in markets that are not active or for
which all significant inputs are observable, directly or indirectly.
Financial assets utilizing Level 2 inputs include foreign currency option
contracts and forward exchange contracts and some corporate securities.
The selection of a particular model to value an OTC foreign currency
derivative depends upon the contractual term of, and specific risks
inherent with, the instrument as well as the availability of pricing
information in the market. We generally use similar models to value
similar instruments. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit curves
and measures of volatility. For OTC foreign currency derivatives that
trade in liquid markets, such as generic forward, option and swap
contracts, model inputs can generally be verified and model selections do
not involve significant management
judgment.
|
|
•
|
Level
3—Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. Financial assets utilizing Level 3 inputs
include money market funds comprised of the Reserve Primary Fund and the
Reserve International Liquidity Fund, collectively referred to as the
Reserve Funds, and corporate securities comprised of auction rate
securities. We use the market approach to estimate the price that would be
received to sell our Reserve Funds in an orderly transaction between
market participants ("exit price"). We reviewed the underlying holdings
and estimated the price of underlying fund holdings to estimate the fair
value of these funds. We use an income approach valuation model to
estimate the exit price of the auction rate securities, which is derived
as the weighted average present value of expected cash flows over various
periods of illiquidity, using a risk adjusted discount rate that is based
on the credit risk and liquidity risk of the
securities.
|
Availability
of observable inputs can vary from instrument to instrument and to the
extent that valuation is based on inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised by our management in
determining fair value is greatest for instruments categorized in Level 3. In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. In
regards to our Reserve Funds, the market approach was based on both Level 2
(term, maturity dates, rates and credit risk) and Level 3 inputs. We determined
that the Level 3 inputs, particularly the liquidity premium, were the most
significant to the overall fair value measurement. In regards to our
auction rate securities, the income approach valuation model was based on both
Level 2 (credit quality and interest rates) and Level 3 inputs. We determined
that the Level 3 inputs were the most significant to the overall fair value
measurement, particularly the estimates of risk adjusted discount rates and
ranges of expected periods of illiquidity.
Unrealized
gains and losses of our available-for-sale securities and foreign currency
derivatives are excluded from earnings and reported as a component of other
comprehensive income (loss) on the Consolidated Balance Sheets.
Additionally, we assess whether an other-than-temporary impairment loss on our
available-for-sale securities has occurred due to declines in fair value or
other market conditions. Declines in fair value that are considered
other-than-temporary are recorded in other, net in the Consolidated Statements
of Operations.
In
general, investments with original maturities of greater than ninety days and
remaining maturities of less than one year are classified as short-term
investments. Investments with maturities beyond one year may also be classified
as short-term based on their highly liquid nature and because such investments
represent the investment of cash that is available for current
operations.
We also
invest in auction rate securities that are typically over-collateralized and
secured by pools of student loans originated under the Federal Family Education
Loan Program, or FFELP, that are guaranteed and insured by the U.S. Department
of Education. In addition, all auction rate securities held are rated by one or
more of the Nationally Recognized Statistical Rating Organizations, or NRSRO, as
triple-A. Historically, these securities have provided liquidity through a Dutch
auction at pre-determined intervals every seven to 49 days. When auction
rate securities fail to clear at auction and we are unable to estimate when the
impacted auction rate securities will clear at the next auction, we classify
these as long-term, consistent with the stated contractual maturities of the
securities. The “stated” or “contractual” maturities for these securities
generally are between 20 to 30 years. A failed auction results in a lack of
liquidity, which occurs when sell orders exceed buy orders, and does not
necessarily signify a default by the issuer. Beginning in February 2008,
the auction rate securities market experienced a significant increase in the
number of failed auctions. See “Item 1A Risk Factors – If the recent credit market
conditions continue or worsen, they could have a material adverse impact on our
investment portfolio.” See also Note 6 of Notes
to our Consolidated Financial Statements.
Accounting
for Income Taxes
Our
global operations involve manufacturing, research and development and selling
activities. Profit from non-U.S. activities is subject to local country taxes
but not subject to United States tax until repatriated to the United States. It
is our intention to indefinitely reinvest these earnings outside the United
States. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. In assessing the need for a
valuation allowance, we consider historical levels of income, expectations and
risks associated with the estimates of future taxable income and ongoing prudent
and feasible tax planning strategies. In the event we determine that we would be
able to realize additional deferred tax assets in the future in excess of the
net recorded amount, or if we subsequently determine that realization of an
amount previously recorded is unlikely, we would record an adjustment to the
deferred tax asset valuation allowance, which would change income in the period
of adjustment.
On
January 1, 2007, we adopted the provisions for FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes, and Related Implementation Issues,”
or FIN 48, which is an interpretation of SFAS No. 109. FIN 48 prescribes a
recognition threshold that a tax position is required to meet before being
recognized in the financial statements and provides guidance on de-recognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition issues. FIN 48 contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon ultimate settlement.
The
calculation of tax liabilities involves dealing with uncertainties in the
application of complex global tax regulations. We recognize potential
liabilities for anticipated tax audit issues in the United States and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If the estimate of tax liabilities proves to be less than the
ultimate tax assessment, a further charge to expense would result. We
accrue interest and penalties on tax contingencies as required by FIN 48 and
SFAS No. 109. This interest and penalty accrual is classified as income tax
provision (benefit) in the Consolidated Statements of Operations and is not
considered material. See Note 13 of Notes to our Consolidated Financial
Statements.
In
addition, foreign exchange gains (losses) may result from estimated tax
liabilities, which are expected to be realized in currencies other than the U.S.
dollar.
Results
of Operations
Revenue
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Systems
revenue
|
$
|
820,632
|
$
|
464,178
|
$
|
—
|
||||||
|
Components
revenue
|
614,287
|
310,612
|
236,510
|
|||||||||
|
Total
revenue
|
$
|
1,434,919
|
$
|
774,790
|
$
|
236,510
|
||||||
Total
Revenue: During fiscal 2008 and 2007, our total revenue was $1,434.9
million and $774.8 million, respectively, an increase of 85%. Our fiscal 2007
revenue increased 228% compared to our total revenue in 2006 of $236.5 million.
The significant increase in our total revenue from fiscal 2007 to 2008 is
attributable in part to the Systems Segment’s installation of more than 40
megawatts of production for several large-scale solar power plants in Spain, the
Components Segment’s continued increase in the demand for our solar cells and
solar panels and the continued increases in unit production and unit
shipments of both solar cells and solar panels as we have expanded our
manufacturing capacity. The significant increase in our total revenue from
fiscal 2006 to 2007 resulted from the combination of an increase in components
revenue of approximately $74.1 million during fiscal 2007, and the addition of
$464.2 million in systems revenue for fiscal 2007, as a result of the
acquisition of PowerLight (now known as SP Systems). We had twelve, seven and
four solar cell manufacturing lines in our two solar cell manufacturing
facilities as of December 28, 2008, December 30, 2007 and December 31, 2006,
respectively, with a total rated manufacturing capacity of 414 megawatts, 214
megawatts and 108 megawatts, respectively, per year. During fiscal 2008, 2007
and 2006, our two solar cell manufacturing facilities produced 236.9
megawatts, 100.1 megatwatts and 66.7 megawatts, respectively.
Sales
outside the United States represented approximately 64%, 55% and 68% of our
total revenue for fiscal 2008, 2007 and 2006, respectively, and we expect
international sales to remain a significant portion of overall sales for the
foreseeable future. International sales as a percentage of our total revenue
increased approximately 9% from fiscal 2007 to 2008 as our Systems Segment
installed more than 40 megawatts of production for several large-scale solar
power plants in Spain in fiscal 2008, and our Components Segment continues to
expand our global dealer network, with an emphasis on European expansion.
International sales as a percentage of our total revenue decreased approximately
13% from fiscal 2006 to 2007 primarily due to the completion of an approximately
14 megawatt solar power plant at Nellis Air Force Base in Nevada that currently
represents our largest installed solar power project in North
America.
Concentrations: We
have eight customers that each accounted for more than 10 percent of our total
revenue in one or more of fiscal 2008, 2007 and 2006 as follows:
|
Year Ended
|
|||||||
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||
|
Significant
customers:
|
Business
Segment
|
||||||
|
Naturener
Group
|
Systems
|
18%
|
*
|
—%
|
|||
|
Sedwick
Corporate, S.L.
|
Systems
|
11%
|
*
|
—%
|
|||
|
SolarPack
|
Systems
|
*
|
18%
|
—%
|
|||
|
MMA
Renewable Ventures
|
Systems
|
*
|
16%
|
—%
|
|||
|
Conergy
AG
|
Components
|
*
|
*
|
25%
|
|||
|
Solon
AG
|
Components
|
*
|
*
|
24%
|
|||
|
PowerLight**
|
Components
|
n.a.
|
n.a.
|
16%
|
|||
|
General
Electric Company***
|
Components
|
*
|
*
|
10%
|
|||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
We
generate revenue from two business segments, as follows:
Systems
Segment Revenue: Our systems revenue for fiscal 2008 and 2007 was
$820.6 million and $464.2 million, respectively, which accounted for 57% and
60%, respectively, of our total revenue. We had no systems revenue in fiscal
2006. For fiscal 2008 and 2007, 92% and 84%, respectively, of systems
revenue was from EPC construction contracts and the remaining 8% and 16%,
respectively, was from materials-only sales contracts. Our systems revenue is
largely dependent on the timing of revenue recognition on large construction
projects and, accordingly, will fluctuate from period to period. For fiscal
2008, our Systems Segment benefited from strong power plant scale demand in
Europe, primarily in Spain, and reflected the completion of Spain based projects
before the expiration of the pre-existing feed-in tariff in September 2008. For
fiscal 2007, our Systems Segment benefited from strong demand for our solar
power systems in a rapidly growing solar business environment, particularly with
respect to the ongoing evolution of country-specific customer incentive
programs.
Naturener
Group, Sedwick Corporate, S.L., SolarPack and MMA Renewable Ventures purchased
systems from us as central-station power plants which generate electricity for
sale to commercial customers and under tariff to regional and public utilities
customers. In fiscal 2008 and 2007, approximately 37% and 32%, respectively, of
our total revenue was derived from such sales of systems to financing companies
that engage in power purchase agreements with end-users of
electricity.
Components
Segment Revenue: Components revenue for fiscal 2008, 2007 and 2006
was $614.3 million, $310.6 million and $236.5 million, respectively, or 43%, 40%
and 100%, respectively, of our total revenue. During fiscal 2008, our
Components Segment benefited from strong demand in the residential and small
commercial roof-top markets through our dealer network in both Europe and the
United States. During fiscal 2008, we tripled the size of our dealer
network by adding more than 350 dealers worldwide. During fiscal 2007 and 2006,
our Components Segment benefited from continued strong world-wide demand for our
solar power products, increasing sequential quarterly average selling prices and
production volume output.
Cost
of Revenue
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Cost
of systems revenue
|
$
|
653,569
|
$
|
386,511
|
$
|
—
|
||||||
|
Cost
of components revenue
|
417,669
|
240,475
|
186,042
|
|||||||||
|
Total
cost of revenue
|
$
|
1,071,238
|
$
|
626,986
|
$
|
186,042
|
||||||
|
Total
cost of revenue as a percentage of revenue
|
75
|
%
|
81
|
%
|
79
|
%
|
||||||
|
Total
gross margin percentage
|
25
|
%
|
19
|
%
|
21
|
%
|
||||||
Details
to cost of systems revenue is as follows:
|
Year
Ended
|
||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
||||||
|
Amortization
of purchased intangible assets
|
$
|
7,691
|
$
|
20,085
|
||||
|
Stock-based
compensation
|
10,745
|
8,187
|
||||||
|
Factory
pre-operating costs
|
1,069
|
939
|
||||||
|
All
other cost of revenue
|
634,064
|
357,300
|
||||||
|
Total
cost of revenue
|
$
|
653,569
|
$
|
386,511
|
||||
|
Cost
of systems revenue as a percentage of revenue
|
80
|
%
|
83
|
%
|
||||
|
Total
gross margin percentage
|
20
|
%
|
17
|
%
|
||||
Details
to cost of components revenue is as follows:
|
Year
Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Amortization
of purchased intangible assets
|
$
|
4,305
|
$
|
4,767
|
$
|
4,690
|
||||||
|
Stock-based
compensation
|
8,144
|
4,213
|
846
|
|||||||||
|
Impairment
of long-lived assets
|
2,203
|
—
|
—
|
|||||||||
|
Factory
pre-operating costs
|
1,870
|
3,964
|
383
|
|||||||||
|
All
other cost of revenue
|
401,147
|
227,531
|
180,123
|
|||||||||
|
Total
cost of revenue
|
$
|
417,669
|
$
|
240,475
|
$
|
186,042
|
||||||
|
Cost
of components revenue as a percentage of revenue
|
68
|
%
|
77
|
%
|
79
|
%
|
||||||
|
Total
gross margin percentage
|
32
|
%
|
23
|
%
|
21
|
%
|
||||||
Total
Cost of Revenue: During fiscal 2008 and 2007, our total cost of
revenue was $1,071.2 million and $627.0 million, respectively, which represents
an increase of 71%. Our fiscal 2007 cost of revenue increased 237% compared to
our total cost of revenue in 2006 of $186.0 million. The increase in total cost
of revenue resulted from increased volume in all cost of revenue spending
categories and corresponds with an increase of 85% in total revenue from fiscal
2007 to 2008 and 228% from fiscal 2006 to 2007. As a percentage of total
revenue, our total cost of revenue decreased from 81% in fiscal 2007 to 75% in
fiscal 2008. This decrease in total cost of revenue as a percentage of total
revenue is reflective of decreased costs of polysilicon beginning in the second
quarter of fiscal 2008 and improved manufacturing economies of scale associated
with markedly higher production volume, partially offset by (i) a one-time asset
impairment charge of $2.2 million in fiscal 2008 relating to the
wind-down of our imaging detector product line; (ii) a more favorable mix of
business in our Systems Segment that benefited gross margin by approximately
five percentage points during fiscal 2007; and (iii) the $2.7 million settlement
received from one of our suppliers in the Components Segment during fiscal 2007
in connection with defective materials sold to us during 2006 that was reflected
as a reduction to total cost of revenue.
As a
percentage of total revenue, our total cost of revenue increased from 79% in
fiscal 2006 to 81% in fiscal 2007 primarily due to a $20.1 million increase in
amortization of intangible assets charged to cost of systems revenue for fiscal
2007 and an additional $8.2 million in stock-based compensation expense charged
to cost of systems revenue incurred in fiscal 2007, both associated with our
acquisition of PowerLight (now known as SP Systems). Additionally, costs of raw
materials such as polysilicon continued to increase from fiscal 2006 to 2007 and
we began incurring pre-operating costs associated with FAB2 and solar panel
assembly facility starting in the fourth quarter of 2006. The additional cost of
revenue in fiscal 2007 was only partially offset by improved manufacturing
economies of scale associated with markedly higher production volume and
improved yields.
Since the
second half of 2006, we have increased our estimated warranty reserve provision
rates based on results of our recent testing that simulates adverse
environmental conditions and potential failure rates our solar panels could
experience during their 20-year warranty period. Provisions for
warranty reserves charged to cost of revenue were $14.2 million, $10.8
million, and $3.2 million during fiscal 2008, 2007 and 2006, respectively. As a
result of the acquisitions of SunPower Italia and SunPower Australia in fiscal
2008 and PowerLight (now known as SP Systems) in fiscal 2007, amortization of
intangible assets charged to cost of revenue totaled $12.0 million in fiscal
2008, as compared to $24.9 million in fiscal 2007 and $4.7 million in fiscal
2006. Amortization of intangible assets charges represent amortization of
purchased technology, patents, trademarks and other intangible assets.
Stock-based compensation charges to cost of revenue were $18.9 million, $12.4
million, and $0.8 million during fiscal 2008, 2007 and 2006,
respectively. The substantial increase in stock-based compensation expense
in fiscal 2008 and 2007 as compared to fiscal 2006 primarily relates to the
acquisition of PowerLight (now known as SP Systems).
Systems
Segment Gross Margin: Gross margin was $167.1 million and $77.7
million for fiscal 2008 and 2007, respectively, or 20% and 17% of systems
revenue, respectively. Gross margin increased due to a higher percentage of
SunPower solar panels used in its projects as well as cost savings we realized
from more efficient field implementation of our systems trackers.
Components
Segment Gross Margin: Gross margin was $196.6 million, $70.1 million
and $50.5 million for fiscal 2008, 2007 and 2006, respectively, or 32%, 23% and
21%, respectively, of components revenue. Gross margin increased due to higher
average solar cell conversion efficiency and better silicon utilization,
continued reduction in silicon costs, higher volume, and slightly higher average
selling prices.
Research
and Development
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Research
& development
|
$
|
21,474
|
$
|
13,563
|
$
|
9,684
|
||||||
|
As
a percentage of revenue
|
1
|
%
|
2
|
%
|
4
|
%
|
||||||
During
fiscal 2008 and 2007, our research and development expense was $21.5 million and
$13.6 million, respectively, which represents an increase of 58%. Our fiscal
2007 research and development expense increased 40% compared to $9.7 million in
fiscal 2006. The increase in spending year-over-year resulted primarily from:
(i) increases in salaries, benefits and stock-based compensation costs as a
result of increased headcount from approximately 40 on December 31, 2006 to 70
on December 30, 2007 to 150 on December 28, 2008; and (ii) costs related to the
development of our second generation of more efficient solar cells and thinner
polysilicon wafers for solar cell manufacturing, as well as development of new
processes to automate solar panel assembly operations. These increases were
partially offset by grants and cost reimbursements received from various
government entities in the United States.
Sales,
General and Administrative
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Sales,
general & administrative
|
$
|
173,740
|
$
|
108,256
|
$
|
21,677
|
||||||
|
As
a percentage of revenue
|
12
|
%
|
14
|
%
|
9
|
%
|
||||||
During
fiscal 2008 and 2007, our sales, general and administrative expense, or SG&A
expense, was $173.7 million and $108.3 million, respectively, which represents
an increase of 60%. Our fiscal 2007 SG&A expense increased 399% compared to
$21.7 million in fiscal 2006. The increase in costs year-over-year resulted
primarily from higher spending in all of the functional areas to support the
growth of our business. Headcount related to SG&A expense increased
from approximately 90 on December 31, 2006 to 230 on December 30, 2007 to 640 on
December 28, 2008. Additional costs increases were related to sales and
marketing spending to expand our global dealer network primarily in Europe and
global branding initiatives, as well as increased expenses associated with
deployment of a new enterprise resource planning system, legal and accounting
services. During fiscal 2008, 2007 and 2006, stock-based compensation included
in our SG&A expense was approximately $47.3 million, $37.0 million and $2.8
million, respectively. As a percentage of revenue, SG&A
expense decreased to 12% in fiscal 2008 from 14% in fiscal 2007,
because these expenses increased at a lower rate than the rate of growth of
our revenue. SG&A expense increased from 9% in fiscal 2006 to 14% in
fiscal 2007 largely due to the acquisition and integration of PowerLight (now
known as SP Systems).
Purchased
In-Process Research and Development, or IPR&D
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Purchased
in-process research and development
|
$ |
—
|
$ |
9,575
|
$ |
—
|
||||||
|
As
a percentage of revenue
|
n.a.
|
1
|
% |
n.a.
|
||||||||
For
fiscal 2007, we recorded an IPR&D charge of $9.6 million in connection
with the acquisition of PowerLight (now known as SP Systems) in January 2007, as
technological feasibility associated with the IPR&D projects had not been
established and no alternative future use existed. No in-process research and
development expense was recorded for fiscal 2008 and 2006. See Note 3 of Notes
to our Consolidated Financial Statements.
Impairment
of Acquisition-Related Intangible Assets
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Impairment
of acquisition-related intangible assets
|
$
|
—
|
$
|
14,068
|
$
|
—
|
||||||
|
As
a percentage of revenue
|
n.a.
|
2
|
%
|
n.a.
|
||||||||
For
fiscal 2007, we recognized a charge for the impairment of acquisition-related
intangible assets of $14.1 million. In June 2007, we changed our branding
strategy and consolidated all of our product and service offerings under the
SunPower tradename. As a result of the change in our branding
strategy, during the quarter ended July 1, 2007, the net book value of the
PowerLight tradename of $14.1 million was written off as an impairment of
acquisition-related intangible assets. See Note 3 and 4 of Notes to our
Consolidated Financial Statements.
Other
Income (Expense), Net
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Interest
income
|
$
|
10,789
|
$
|
13,882
|
$
|
10,086
|
||||||
|
As
a percentage of revenue
|
1
|
%
|
2
|
%
|
4
|
%
|
||||||
|
Interest
expense
|
$
|
(4,387)
|
$
|
(5,071)
|
$
|
(1,809)
|
||||||
|
As
a percentage of revenue
|
(0)
|
%
|
(1)
|
%
|
(1)
|
%
|
||||||
|
Other,
net
|
$
|
(27,285)
|
$
|
(7,593)
|
$
|
1,077
|
||||||
|
As
a percentage of revenue
|
(2)
|
%
|
(1)
|
%
|
0
|
%
|
||||||
Interest
income during fiscal 2008, 2007 and 2006 primarily represents interest income
earned on our cash, cash equivalents, restricted cash and investments during
these periods. The decrease in interest income of 22% from fiscal 2007 to 2008
resulted from lower cash holdings related to capital expenditures for our
manufacturing capacity expansion. The increase in interest income of 38% from
fiscal 2006 to 2007 is primarily the effect of interest earned on $581.5 million
in net proceeds from our class A common stock and convertible debenture
offerings in February and July 2007, partially offset by the use of cash for
capital expenditures for our manufacturing capacity expansion.
Interest
expense during fiscal 2008 and 2007 relates to interest due on convertible
debt and customer advance payments. Interest expense during fiscal 2006
primarily relates to customer advance payments. The decrease in interest expense
of 13% from fiscal 2007 to 2008 resulted from capitalized interest of $1.4
million in fiscal 2008. The increase in interest expense of 180% from fiscal
2006 to 2007 is primarily due to interest related to the aggregate of $425.0
million in convertible debentures issued in February and July 2007. Our
convertible debt was used in part to fund our capital expenditures for our
manufacturing capacity expansion.
In May
2008, the FASB issued FSP APB 14-1 “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement),” or FSP APB 14-1, which clarifies the accounting for convertible
debt instruments that may be settled in cash upon conversion. FSP APB 14-1
significantly impacts the accounting for our convertible debt by requiring us to
separately account for the liability and equity components of the convertible
debt in a manner that reflects interest expense equal to our non-convertible
debt borrowing rate. FSP APB 14-1 may result in significantly higher non-cash
interest expense on our convertible debt. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008, and retrospective
application will be required for all periods presented.
The
following table summarizes the components of other, net:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
28,
2008
|
December
30,
2007
|
December
31,
2006
|
|||||||||
|
Write-off
of unamortized debt issuance costs
|
$
|
(972
|
)
|
$
|
(8,260
|
)
|
$
|
—
|
||||
|
Amortization
of debt issuance costs
|
—
|
(1,710
|
)
|
—
|
||||||||
|
Impairment
of investments
|
(5,408
|
)
|
—
|
—
|
||||||||
|
Gain
(loss) on derivatives and foreign exchange, net of tax
|
(20,602
|
)
|
2 | |||||||||